(navigation image)
Home American Libraries | Canadian Libraries | Universal Library | Community Texts | Project Gutenberg | Children's Library | Biodiversity Heritage Library | Additional Collections
Search: Advanced Search
Anonymous User (login or join us)
Upload
See other formats

Full text of "Legal barriers to competition in Montana State and local law"

SMALL BUSINESS MANAGEMENT 
RESEARCH REPORTS 




Legal Barriers to Competition 

in Montana 

State and Local Law 




338. Vttfc 



Prepared by the Bureau of Business and Economic Research 

MONTANA STATE UNIVERSITY for the 

MONTANA STATE PLANNING BOARD 

under a grant from the 

Small Business Administration, Washington 25, D. C. 



UNIVERSITY 
OF FLORIDA 
LIBRARIES 




Legal Barriers to Competition in Montana 
State and Local Law 



Prepared by the Bureau of Business and Economic Research 

MONTANA STATE UNIVERSITY under a 

Small Business Administration grant awarded to the 

MONTANA STATE PLANNING BOARD 



By 

EDWIN W. BRIGGS 

Professor of Law 
Montana State University, Missoula 



Project Leader 

EDWARD J. CHAMBERS 

School of Business Administration 
Montana State University, Missoula 



Project Director 
THOMAS J. COLLINS 

Director, Montana State Planning Board 



September 1964 



3 SS^l 



, 3- 




CONTENTS 



Foreword vii 

Preface ix 

I. Underlying Assumptions, Rationale For, Limitations 

On, and Exclusions From the Study 1 

Introduction 1 

Fundamental Problem 2 

Central Assumptions 3 

Variable Meaning of Competition 5 

Exclusions From This Study 5 

Inclusions 8 



II. Regulation of Non-Price Competition 



h 



* 



Four Montana Cases 9 

Photographic Code 9 

Pharmacy Code 11 

Municipal Ordinance 13 

Trading Stamp Tax 14 

Summary 15 

III. Legislative History of Commissions Administering 

Unfair Practices and Fair Trade Acts 17 

3 

Introduction 17 

History of State Regulatory Agencies 17 



IV. The Unfair Practices Act 20 

K 

Introduction 20 

General Provisions Regulating Prices 21 

Prohibited Sales Practices 22 

Persons Entitled to Sue and Penalties 23 

Trade Commission Membership and Powers 24 

4 hi 



Two Cases 28 

Quantum of Evidence 32 

Trade Pressures to Administer Act as a Price Fixing 

Measure 33 

Enforcement in Other States 35 

California's Unfair Practices Act 36 

Statutory Presumptions 37 

Loss Leaders — No Quantity Limit 38 

Apparent Law in 1950 — Coad's Analysis 39 

Informal Enforcement 41 

Attorney General's 1953 Opinion 42 

Recent Commission Administration and Practice 45 

Modern California Law 47 

Court Decisions 47 

Current Administrative Policy 49 

Evaluation 50 

The Ideal Commission 51 

1963 Addendum 53 

Fair Trade Acts 59 

Introduction 59 

Montana's Fair Trade Act 60 

Legal Rationale 6 1 

First Provision 61 

Second Provision 63 

U. S. -Montana Law Contrasted 63 

Constitutionality 64 

Non-Signer Clause 65 

Fair Trade Studies by Government Agencies 66 

Legal Status in Other States 67 

Coad's Analysis 69 

Economic Desirability 69 

Personal Interviews with Dealers 71 

Defects in Marketing Practices 72 

Enforcement of Fair Trade Acts 74 

Conclusion 7 5 

Postlude 76 

1963 Addendum 77 

iv 



VI. Barbers and Barber Shops, Beauticians and Beauty 
Shops 80 

Introduction 80 

Early Legislation 82 

Code Analysis 82 

Barber Code 82 

Beauticians Code 83 

Price Fixing Regulations Analyzed 84 

Administration of the Acts 86 

Barber Act 86 

Cosmetology Board 87 

1961 Cosmetology Code 88 

Constitutionality 89 

Substantive Due Process 90 

Procedural Due Process 93 

Delegation to Private Groups 95 

Sufficiency of Statutory Guides for Price Fixing 96 

Disqualifying Penalties 97 

Constitutionality 101 

1963 Addendum 103 

VII. The Milk Control Act 104 

Introduction 104 

Economic Consequences of Regulation 104 

Earliest Regulation 105 

1 939 Act 106 

Milk Control Board 107 

Miscellaneous Provisions 109 

1959 Amendments 110 

Board Powers Expanded 110 

Expanded Supervision 112 

Board Administration Under 1959 Act 113 

Constitutionality 115 

Possible Grounds for Challenge 116 

Interpretation and Administration Problems 118 

Area X Hearing 118 

Montana Dairymen's Association's Arguments 119 

Field Auditor's Pricing Criteria 120 

Code's Pricing Criteria 121 

California Pricing Experience 121 



Federal Pricing Experience 122 

Administrator's Pricing Dilemma 123 

Eastern Montana Experience 124 

"Base" 126 

Distributor's Dominance 126 

Development of "Base" 128 

Alleged Abuses 1 28 

Relevant Litigation 129 

Legal Status of "Base" 131 

Boylan Case 132 

"Base" and the Board 133 

Alternative Democratic Techniques 134 

"Cooperatives" Supported in Dairy Institute 134 

Producers' Cooperatives 137 

Additional "Vital Issues" 138 

First Issue — Base and Pooling 138 

Second Issue — Pricing Standards 139 

Third Issue—Pricing "Excess" 142 

Fourth Issue — Schools and Institutions 142 

Fifth Issue— Plant-to-Plant Prices 144 

Sixth Issue — Unfair Trade Practices i 145 

Seventh Issue — Interstate Competition 146 

State-Federal Cooperation 147 

Federal Orders 147 

Review of Policy 148 

1963 Addendum 150 

Recent Litigation 150 

Formula Pricing 152 

"Base" Again 153 

Conclusion 154 

VIII. Summation 156 

Unfair Practices Act 156 

Fair Trade Acts 160 

Barber and Beauty Shop Acts 161 

Milk Control Act 162 

1963 Addendum 165 



VI 



FOREWORD 



This Small Business study, Legal Barriers to Competition in 
Montana State and Local Law, has been conducted and prepared 
by Montana State University under the direction of Thomas J. 
Collins, Project Director for the Montana State Planning Board. 

The research was financed by a grant made by the Small Business 
Administration, United States Government under the authority of 
Public Law 699 (85th Congress). 

Only limited number of copies of this report have been printed. 
It is available for reference in any of the Small Business Adminis- 
tration offices throughout the United States or at many reference 
libraries. Copies of the report also may be purchased for $3.00 
directly from the Bureau of Business and Economic Research, Mon- 
tana State University, Missoula. 

Summaries of this study have been printed and are available in 
reasonable quantities. These summaries may be secured from SBA 
field offices or from the Small Business Administration, Washing- 
ton, D. C. 20416. 

The Small Business Administration assumes no responsibility for 
the accuracy of the data contained herein, nor does it necessarily 
endorse any opinions, conclusions or recommendations which may 
be a part of this report. 

EUGENE P. FOLEY 

Administrator 

Small Business Administration 



Vll 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/legalbarrierstocOObrig 



PREFACE 



This report is part of a project entitled Research on Small Business 
Success and Failure in a Natural Resource Economy conducted by 
the Bureau of Business and Economic Research, Montana State 
University, for the Montana State Planning Board under a Small 
Business Administration grant. 

This study originally was begun in September 1960, and com- 
pleted June 30, 1961. Because of the time involved in the Small 
Business Administration review of the manuscript and as a result 
of prior writing commitments on my part, I was unable to complete 
the final revisions until December 1963. Because a substantial period 
had elapsed since its original completion, it then seemed necessary 
to bring the report "down to date." This explains the textual discus- 
sion, described as an "addendum," appearing at the end of each 
chapter. So the study attempts to describe the administration of 
the Acts considered, and the problems raised thereunder, to Jan- 
uary 1, 1964. 

The study raises interesting questions at several different levels 
of inquiry, and provides or suggests answers for some of those ques- 
tions. Of course, its prime purpose is to inform the members of the 
businesses and trades regulated of the scope and applications of 
those regulations, serving as a day-to-day guide in their business 
operations. In addition to these questions, which are of very im- 
mediate practical importance for management, there also is the 
somewhat less obvious one raised by the title of the general project, 
of which this study forms a part: "Small Business Success and 
Failure in a Natural Resource Economy." In terms of regulation's 
contribution to "success or failure," the answers are not at all clear, 
although in the milk industry it is obvious that during the period of 
regulation, whatever the reasons therefor, the processor-distributors 
have become fewer but much larger, while the relative economic lot 
of the producers generally has improved little, if any. However, it 
is of some interest to learn that such a regulatory code as the "Un- 
fair Practices Act" raises the same questions and begets almost 
exactly the same "solutions" in a highly industrialized economy, 
such as California, as it does in Montana's "Natural Resource 
Economy." 

Similarly, with one exception, the regulatory codes seem to have 
had little impact or influence on the institutional structures of the 
businesses regulated. That one exception again is the milk industry. 

ix 



In that industry, both the operations of the business and the rela- 
tionships of every group involved have been altered very substan- 
tially, and permanently. For those interested, this industry dra- 
matically reveals the modifying interaction and influence of the law 
on existing institutions, raising very real questions as to how bene- 
ficial rigid price controls may be in the long run, as well as to 
whether those controls have outlived their justification. 

The study of Montana's various licensing and regulatory codes 
also divulged an unexpectedly interesting fact with respect to their 
various restrictions on "entry competition" — a bonus bit of informa- 
tion having social implications far beyond the area of strict economic 
regulation. Not only those codes regulating prices, but practically 
all licensing codes, including those for simple trades or occupations, 
subject all persons guilty of a felony (or, sometimes, of conduct 
deemed equally reprehensible) to the risk of being disqualified from 
practicing their trade, though they supposedly have fully paid their 
debt to society and even though the penalizing conduct has no bear- 
ing on their competence. 

Finally, though I could not pursue it in this study, even an inci- 
dental and casual comparison of "governmental activity" in the 
economic realm, between federal and state regulations, raises a very 
real question as to whether state legislators are not more likely to 
respond favorably to pressures for extreme regulation from the 
groups being regulated than is Congress. To answer this question, 
further extensive study and analysis would be necessary. 

EDWIN W. BRIGGS 
September 1964 



Chapter I 

Underlying Assumptions, Rationale for, 

Limitations on, and Exclusions 

from the Study 

INTRODUCTION 

This study of legal barriers to competition is one of several units 
or areas in which the problems of small business and services in 
Montana are examined. Standing alone, the title 1 of this study is 
not altogether self-explanatory. When considered, however, as part 
of the over-all integrated project as set up by its planning commit- 
tee, and entitled "Research on Small Business Success and Failure 
in a Natural Resource Economy," it becomes apparent that we are 
primarily concerned with Montana's legal restrictions generally, on 
a "free market," particularly as they affect the success or failure 
of small businesses. Even after achieving this generalized perspec- 
tive, however, it is not self-evident whether such legal barriers may 
be expected to contribute to the success of small enterprises and 
services, on the one hand, or to their failure on the other. We must 
look to certain underlying assumptions of Western economic society 
to determine the presumed effect of any form of barrier interfering 
with, obstructing or hampering the natural operations of a free 
market. 

Quite generally, it has been assumed that restraints on trade of 
any kind whatever, interfering with freedom of competition, are an 
unmitigated evil. The fact is, however, that much of the legislation 
we shall have to deal with has been enacted on a quite contrary 
assumption; i.e., that cut-throat competition is ruinous competition 
and thus an unbearable evil, and that this kind of competition is 
most likely to operate by price manipulations. And, of course, it 
has long since become an established fact that extreme price cutting 
is a prime weapon for the monopolist with superior economic re- 
sources and power, enabling him first to eliminate his competition 
and then to take over the market on his own terms. 2 Hence, we 



] It has proved impracticable to do more than touch very lightly on municipal 
ordinances, as local law, both because of time limitations, and of their general 
inaccessibility. 
2 In his THE PRICE DISCRIMINATION LAW (1959), Corwin Edwards notes 



shall give as factual and objective an account as we can, both of 
the character of such legal restrictions and of our experience under 
them, to determine in what respects and to what extent under 
presently existing economic conditions, these legal barriers may 
either harm or benefit small businesses. 

That there should exist any such legal restrictions is at least a 
compromise with, if not a repudiation of, economic doctrine tra- 
ditionally very dear to us — this even though there always have 
been varied and extensive regulations of many kinds. This calls 
for a little historical explanation. 

FUNDAMENTAL PROBLEM 

The free market, both as an operative condition to a healthy 
economy and as an ideal, is supposed to serve several fundamental 
values in our Western culture. It is an assumed condition for main- 
taining the "free economic man" so as to maximize all of his 
potential abilities. Theoretically, it assures maximum participation 
of the individual in the entire economic process. This concept coin- 
cides with and is fed by the political ideal of maximum participation 
of the individual in the political institutions of our society. These 
same ideals are considered equally basic to our educational and 
religious institutions. Both of them support, and in turn are sup- 
ported by, the ideal of maximum social equality, with no restrictions 
or barriers of any kind to access from one social group to another. 3 

Only slight observation demonstrates that these ideals of freedom 
are only partly realized in our society; nevertheless, they have 
served well in the past in developing a viable culture and a dynamic 
economic order. One of the principal virtues of this order has 
appeared to be its success in developing a massive middle class with 
the opportunity to make the most of its natural economic and other 
talents. And we have come to feel that our society must assure to 
the largest possible number of individuals the opportunity to enter 
and to maintain themselves successfully in our industrial and eco- 
nomic world, contributing all the resourcefulness, ingenuity, and 
originality which they may possess to the continuing process of 

a major modification in the problems posed by monopoly pricing practices, 
over the last forty-five years, as well as a shift in the type of legislative action 
taken to deal with them. To explain the passage of the Robinson-Patman Act, 
he observes: "Local price cutting to obtain a monopoly, such as Congress had 
in mind in 1914, had ceased to be a major political problem. New problems 
had come to the fore because of great changes that were taking place in the 
channels of distribution." 

3 Edwards partially expresses these ideas in explaining the origins of the con- 
cept of discrimination: "The idea of discrimination has a shadowy origin in 
the social and legal preconceptions of democratic society. In a democratic 
community equality of status is taken for granted. Such equality implies equal 
position before the law, equal political rights and duties, and equal economic 
opportunities." Edwards, supra, note 2, page 1. 



evolving and adapting our economic institutions to our current 
needs. 

Actually, the necessity for evolving and adapting our economic 
institutions to current needs is perhaps the paramount issue of our 
society today: How much evolving and adapting is desirable or 
even permissible, within the framework of Western culture? We 
find violently opposing views on this question: at one pole the ex- 
treme conservative — the conformist, the "status quoer;" at the other, 
the extreme liberal — the activist. Our immediate problem may be 
highlighted by asking three questions: 1. Do modern industrial 
developments require us to surrender the ideal of the free market? 
2. If not, have the normal operations of the market revealed certain 
developing evils which threaten that market and which require 
government intervention by regulation? 3. Is it possible to provide 
such regulation without surrendering the ideal? 

Not surprisingly, those who hold these opposing views give ex- 
tremely divergent answers to these questions. The ultra conserva- 
tive theoretically opposes any government regulation or other form 
of intervention, though, strangely, many who maintain this position 
formally are among the first to support government intervention 
and regulation where its object is to give them or the class with 
which they identify themselves some particular advantage in the 
name of "public health," "police power," or the "general welfare." 
On the other hand, the liberal "activist" may show a tendency to 
take a "welfare state" approach, with the constant danger of ap- 
proving too broad and general regulations — failing to distinguish 
carefully and to limit the scope of the controls proposed to the evils 
to be eliminated. There is also a third view, rejecting both of these 
extremes, which not only insists that we must use what knowledge 
we have to cope with emerging problems, but also readily recognizes 
the elementary dictates of common sense in dealing with them. 
Those who hold this view demand a careful limiting of the remedy 
to the evil treated, using no remedy that does not give true relief, 
and insisting on applying any given cure only so long as needed. 

CENTRAL ASSUMPTIONS 

Granted that, in the past several decades, many Western econo- 
mies, particularly in Europe, have submitted to cartelization, the 
antithesis of the free market; granted even that the oligopolist 4 

'E. H. Chamberlain, THE THEORY OF MONOPOLISTIC COMPETITION 
(1933); Joan Robinson, THE ECONOMICS OF IMPERFECT COMPETITION 
(1932). In his doctoral thesis, University of Iowa, Wallace Boyd Nelson gives 
an informative description of the factors influencing pricing practices in an 
oligopolist (imperfect competition) industry. Nelson, THE OIL INDUSTRY: 
A CASE STUDY IN IMPERFECT COMPETITION (1950), Chapter II, The 
Theory of Oligopoly. 



can marshal much evidence supporting his view that the free market 
is doomed in America, and that we must adapt our ideas of the 
market and of trade to conditions of imperfect competition resulting 
from the presence of only a few large operators in the market; we 
are nevertheless committed to the ideal of the free market for the 
sake of our economy and the ideals which we would serve and 
preserve therein. In the project of which this study forms a part, 
it is assumed not only that many successful small businesses are 
necessary to a vital economic system, but also that an essential of 
their success is a healthy competitive environment. Moreover, the 
Congressional committees which have been studying the problems 
of small business over many years are dedicated to these same 
principles. Their efforts have resulted in the creation of the Small 
Business Administration," and, more recently, in legislation pro- 
viding for easier financing of small business ventures. Studies such 
as this" are made financially possible by Congressional interest in 
the preservation of small business. As for Montana, its constitution 
prohibits, on the basis of these same premises, any form of combi- 
nation seeking to fix prices, or to "regulate the production of any 
article of commerce or of the product of the soil. . . ." s 

In analyzing Montana's legal barriers to competition, therefore, 
we must seek guidance in the principles validating the free market 
generally even though various forms of "cooperative" activity may 
be absolutely essential to the maintaining of that market — and in 
the third view mentioned above, which seems to be dictated by our 
determination to maintain a free market subject only to those regu- 
lations necessary to keep it healthy. (Actually, the principle of the 
free market already has been compelled to abdicate completely in 
a few businesses.) 



"Small Business Act of 1953, 67 Stat. 232, Ch. 282. As amended, 15 USCA, 
sections 631-647. Section 631 forcefully expresses the principles guiding the 
above congressional committees, in the following: 
(a) The essence of the American economic system of private enterprise is 
free competition. Only through full and free competition can free markets, 
free entry into business, and opportunities for the expression and growth of 
personal initiative and individual judgment be assured. The preservation 
and expansion of such competition is basic not only to the economic well- 
being but to the security of this Nation. Such security and well-being cannot 
be realized unless the actual and potential capacity of small business is 
encouraged and developed. 
"Small Business Investment Act, Pub. Law 85-536, 1958, 72 Stat. 387. As 
amended, 15 USCA 631-647, particularly section 636. The 1958 Act actually 
enlarged existing powers of the Small Business Administration to make loans 
and extend other financial assistance to small business. 
'Ibid., section 636 (d): 

The administration also is empowered to make grants to . . . colleges and 
universities, . . . for studies, research, and counselling concerning the 
managing, financing, and operation of small-business enterprises. . . . 
"CONSTITUTION OF MONTANA, Article XV, section 20. 



VARIABLE MEANING OF COMPETITION 

So far, we have used the term "competition" in a very generalized 
sense, as though it had a single and defined application. We have 
not made clear what kind of competition we are talking about. The 
first and most common form of competition involves the pricing of 
commodities or services in a particular market. Actually, however, 
in a completely free market, the competitive principle may find 
expression in many different ways. In addition to (1.) price, it may 
be intensified alternately, as follows: 2. By the entry of new enter- 
prises or services into the market, offering the same or similar 
products — "entry competition;" 3. By stressing the quality of exist- 
ing products, claiming the use of allegedly superior materials and/or 
skills in their manufacture — "quality competition;" 4. By intro- 
ducing other products, with claimed superiority, in substitution for 
the existing ones — "product competition;" 5. By enlarging the 
variety of lines handled by existing business, thus intensifying 
competition for the old line business — e.g., drug stores handling 
groceries, and groceries handling drugs (actually one form of "entry 
competition") — specialty outlets versus general outlets; 6. By intro- 
ducing a product designed primarily to compete with a particular 
kind of labor or skill — perhaps an aspect of "product substitution." 
Though this study is concerned primarily with legal barriers to 
price competition, some of these other areas call for brief attention. 

EXCLUSIONS FROM THIS STUDY 

The barriers, both legal and economic, which a new business must 
surmount to enter into effective competition with established busi- 
nesses vary widely. The most pervasive difficulty for small business 
in entering a market area has been an economic barrier — successful 
financing of the venture. This difficulty has received extensive con- 
sideration from Congress, which has enacted substantial relief legis- 
lation. It is, however, outside the scope of this study of legal 
barriers. 



''Supra, notes 5, 6, and 7. Moreover, Congress's determination that its assist- 
ance shall be on a continuing basis is expressed in the following. 15 USCA, 
section 637 (c) declares that, 
The Administration shall from time to time make studies of matters ma- 
terially affecting the competitive strength of small business, and of the 
effect on small business of Federal laws, programs, and regulations. . . 
And in section 638 (a) it sees fit to make a formal declaration of policy 
concerning research and development: 
Research and development are major factors in the growth and progress of 
industry and the national economy. The expense of carrying on research 
and development programs is beyond the means of many small-business 
concerns. . . . These small-business concerns are thereby placed at a 
competitive disadvantage. ... It is the policy of the Congress that (such) 
assistance be given to small-business concerns to enable them to undertake 
and to obtain the benefits of such research. . . . 



The standard legal requirements for permits and/or licenses, im- 
posed on many businesses and services as a condition for qualifying 
to operate are so completely incorporated into the existing economic 
structure 10 and so generally accepted that we do not question their 
utility here, though when licensing control includes indefensible 
discretionary power to exclude it must be attacked. 

Further, certain lines of business have been subjected to a num- 
ber of independent regulatory boards and commissions with plenary 
power to admit or to exclude, without any effective duty to account 
to anyone; as a result, the small businessman who wishes to enter 
a business so regulated may be subjected to the most serious disad- 
vantages and even to nearly insuperable handicaps when he applies 
for a permit to operate in those areas. This fact has been dramatic- 
ally elaborated recently by Professor Walter Adams in a symposium 
on small business problems appearing in a leading national socio- 
legal periodical. 11 The commissions subjected to Adams' criticism 
include a number of independent federal agencies, such as the Inter- 
state Commerce Commission (ICC), the Civil Aeronautics Boards 
(CAB), the Federal Communications Commission (FCC), and the 
Federal Power Commission (FPC), all operating in the supposedly 
quasimonopolistic field. Professor Adams directs his strictures pri- 
marily at the manner in which the ICC and the CAB dispose of 
applications for "certificates of convenience and public necessity" 
by small trucking and airline transport establishments, and the 
grounds on which they do so. He insists that the small business 
applicant is especially discriminated against for two reasons: 1. The 
Commission inevitably identifies the "public interest" with that of 
the large existing businesses which already have preempted the 
field — "the regulatees wind up doing the regulating," in the words 
of former Senator Burton K. Wheeler. 12 Professor Adams says: 18 

Here, as in other regulated industries, small business may solve the 
technological and economic challenge of the market place . . . (Not- 
withstanding this) the tendency to favor entrenched interests derives 



'"RCM 1947, Title 66, entitled Professions and Occupations, is composed of 
24 chapters, each regulating and licensing a profession or occupation. There 
are extensive additional licensing provisions interspersed elsewhere through- 
out the Code. 

"Walter Adams, The Regulatory Commissions and Small Business, 24 LAW 
AND CONTEMPORARY PROBLEMS, 146-167 (1959). 

v 'Ibid., 164, note 78, citing Blair Bolles, HOW TO GET RICH IN WASHING- 
TON (1952), for this statement by Wheeler. Adams insists that, "Once a 
commission is given the power to dispense private privilege, it is almost 
compelled to validate the financial values predicated on such privilege, and 
does so by suppressing competition wherever possible. The only escape from 
this dilemma is to abolish the power of privilege and, where economically 
and technologically feasible, to place greater reliance on the regulatory 
machinery of competition. This is the only defense which small business has 
against treatment as an economic interloper and outlaw." Id., 164. 
™Id., 159-60. 



from a protective philosophy . . . , the very existence of a large, 
established firm — its presence as a going concern — seems to improve 
its claim to administrative protection. . . . This ... is partly of legis- 
lative origin. ... In effect, newcomers must show that entry will 
not make the industry too competitive to maintain rates and profits 
at a legal rate deemed desirable for the protection of the industry. . . . 
It has used its certification powers to impose an almost insurmount- 
able burden on applicants for new operating authority, . . ." 

2. All too frequently, Commission members pervert the public 
interest and the public trust they are subject to, to the promotion 
of their own personal careers — "subordination of public interest 
to private privilege." 14 

Adams receives powerful support for his condemnation of the 
monopolistic, competition-suppressing practices which he insists 
these commissions indulge in both from the recent Hector memo- 
randum to President Eisenhower, 11 excoriating CAB practices and 
rulings, and from testimony given in the Senate Small Business 
Committee hearings. 1,; Much the same questions might be raised 
with respect to the disposition of the applications for certificates 
of "public convenience and necessity" from small businesses in 
Montana. This inquiry is not included in the present study, however, 
both because of the relatively small number of businesses concerned 
and because of the practical difficulty at this time of making an 



u ld., 164. 

ar 'Louis J. Hector, Problems of the CAB and the Independent Regulatory 
Commissions, 69 YALE LAW JOURNAL 930 (1960). 

"'Federal Reserve System, REPORT TO THE COMMITTEES ON BANKING 
AND CURRENCY, AND THE SELECT COMMITTEES ON SMALL BUSI- 
NESS, UNITED STATES CONGRESS (Parts 1 and 2, 1958). In its Back- 
ground Study No. 14, Public Policies Affecting Small Business, by Ramsay 
Wood, at page 314 ff., this report states that: 
Public policy according special treatment to particular economic activities 
also influences the climate in which small businesses operate. ... To 
achieve their special purposes, such special treatments have set up sheltered 
markets — and shelter not only aids the exercise of economic power, but also 
invites the building of such power. Shelter has usually been justified as 
protecting the small business or an economically weak party; it has often 
wound up creating additional economic restraints against which the small 
business or the economically weak have had to contend. . . . One road to 
shelter is administrative regulation. This can be illustrated by transporta- 
tion. . . . These developments (i.e., feasibility of long-distance motor truck- 
ing) together with the emergence of "cut-throat competition" and failures 
in the trucking business . . . led to the Motor Carrier Act of 1935 to regulate 
interstate trucking. The act provided for limitation of entry into the regu- 
lated business through the requirement of a showing of convenience and 
necessity before new truckers could engage in interstate business. Where 
entry is limited by direct public action, regulation or supervision of prices 
is frequently demanded as protection against discriminatory pricing. . . . 
And where entry is limited and prices are regulated, the problem arises of 
dealing with situations in which franchised companies cannot properly . . . 
serve their areas, and an attractive solution is the merging of companies 
for "efficient" or "rationalized" service. ... As a result, small firms in 
the interstate trucking business must compete against giants, and intrastate 
truckers must be limited in their activities so that they shall not "compete 
unfairly" with duly franchised interstate truckers. 



authoritative study of the disposition of such applications in Mon- 
tana. 

Since this study is concerned with Montana's legal barriers to 
competition, a consideration of the difficulties which a Montana 
concern faces when it decides to enter a competitive market in 
another state is also excluded from it, even though these barriers 
often greatly limit the economic and industrial growth of Montana 
concerns; i.e., their ability to compete successfully in foreign mar- 
kets. Similarly, restrictions applicable only to foreign businesses 
doing business in Montana, also are not considered. 

INCLUSIONS 

Having decided to limit the scope of our study by the above 
exclusions, there remain six principal areas requiring careful study: 
1. Certain miscellaneous cases involving a variety of non-pricing 
regulations restricting competition; 2. The Unfair Practices Act; 
3. The Fair-Trade Act; 4. The Barbers Act; 5. The Beauty Shop 
(Cosmetology) Act; 6. The Milk Control Act. 



Chapter II 
Regulation of Non-Price Competition 

FOUR MONTANA CASES 

Four outstanding and interesting decisions have been made by 
the State Supreme Court, setting limits on the power of the state 
or its political subdivisions to regulate non-price competition and 
involving four quite diverse businesses and occupations. They pro- 
vide at least a glimpse of the general judicial temper in Montana in 
this regard. As we analyze them, it may be helpful to keep in mind 
the standards suggested above for judging the acceptability of legis- 
lation restricting the freedoms ordinarily enjoyed in the regulated 
field: 1. Is there a specific evil which needs correction? 2. If so, is 
the legislative remedy proposed rationally sustainable as a cure or 
does it actually serve some special interest group who would justify 
it in the name of the general welfare? 3. If there is such evil, is the 
remedy limited to its cure, or does it attempt to regulate more than 
is necessary; i.e., is the "cure" worse than the sickness? 

PHOTOGRAPHIC CODE 

The first of these cases establishes definite limits on the power 
of the legislature to provide even for the type of regulation requiring 
an initial licensing and an annual fee for businesses and occupations, 
particularly when such regulations are used as a means for con- 
trolling entry into and for imposing conditions on the practicing of 
such occupations. In 1937, the Montana legislature set up a rather 
elaborate system for regulating and controlling the practice of pro- 
fessional photography. 1 The Act creates a "Board of Examiners in 
Photography" composed of five members appointed by the gov- 
ernor,- each with at least five years practice of photography within 
the state. This board is empowered to receive applications for li- 
censes to practice,^ to give three forms of examinations (portrait, 
commercial, and kodak finishing), 4 to register licenses, and, subject 
to its very broad discretion, to issue or withhold such licenses for 

'LAWS OF MONTANA 1937, Ch. 37, RCM 1947, sections 66-1701 through 
66-1714. 

-Ibid., section 66-1702. 
"Id., section 66-1704. 
'Id., section 66-1705. 



"sufficient reason," following testimony as to the applicant's tech- 
nical qualifications or his "business record." 5 The Board is also 
granted extensive powers to revoke the licenses of any photogra- 
pher "found guilty of fraudulent practices, or willful misrepresenta- 
tions, or for professional inactivity within the state for ... 1 year 
. . . ," or who "is convicted of a crime involving moral turpitude ." 6 
This Board also is responsible for the collection of the annual fees 
and for giving notice of them, and possesses the power and duty to 
revoke such licenses if the fee is not paid within three months after 
it is due. 7 Those engaged in the business on the Act's effective date 
were entitled to receive licenses without examination, on payment 
of the annual fee and sufficient proof of such practice. 8 This Act 
also apparently intended to limit the photographic business to Mon- 
tana residents by requiring ". . . the name of each person working 
under such (business) name, or in any way associated with such 
concern who shall in all cases be a resident of Montana. . . ." 9 The 
Act also made it a misdemeanor to practice without a license, pro- 
viding for a $50-$200 minimum-maximum fine, and/or a one to six 
months term in jail. 10 

In State v. Gleason, u the Supreme Court had to pass on the con- 
stitutionality of this Act, on the defendant's appeal from a conviction 
for the violation of it. The state tried to justify the statute on two 
principal grounds: 1. That since defrauding and deception are pe- 
culiarly adaptable to this occupation, there is special need for the 
public's protection; 12 2. That the public interest in maintaining 
morals and decency requires this regulation, to prevent pornographic 
pictures. 13 Though noting that the tendency of the courts in recent 
years has been to accept the legislature's judgment as to the need 
for certain legislation, the Montana Court insists that: 14 

Unless there is something in the nature of the occupation which calls 
for the exercise of the police power of the states, its purported use by 
the legislature is without constitutional favor. 

r Id., section 66-1704 (b). 

"Id., section 66-1710. (Emphasis added.) 

'Id., section 66-1709. 

"Id., section 66-1711. 

'Id., section 66-1707 (c). (Emphasis added.) 

10 Id., section 66-1713. 

n 277 P 2d 530 (1954). Here, the Montana Supreme Court relies heavily on a 
North Carolina case, State v. Harris, 216 N. C. 746, 6 S. E. 2d 854, 861, which 
ruled unconstitutional that state's statutes providing for "price fixing" in the 
dry cleaning business. The Montana Court quotes extensively from that case, 
approving its rationale completely, which strongly indicates that, at least in 
1954, the Montana Supreme Court would not have allowed this state to regu- 
late that business, in the name of its "police power," any more readily than 
it did the photographic business. 

v2 Ibid., at 532. 

Vi Id., at 533. 

"Id., at 531. 

10 



While it is true that the police power of the state has an ever widen- 
ing horizon it is equally true that its exercise is still under the control 
of the principles of constitutional law and is subject to review by 
the courts, 

apparently ruling that this Act violates substantive due process. 

It finds that: 15 

. . . the Act here in question is arbitrary and capricious and the only 
basis for the consistent reason of an end sought to be obtained is that 
of creating a monopoly for those persons fortunate enough to be in- 
cluded within the formula of the Act itself. 

To the "fraud" argument it answers: 

The art of taking, making and selling photographs is an innocent 
occupation ... it is obvious that all businesses have persons of de- 
ceptive traits yet the general laws appear adequate in connection with 
their inappropriate actions. 

To the "public morals" contention, it says in effect that legislation 

dealing with that specific evil is more appropriate, and that we 

already have such legislation; that the extensive regulation of an 

entire business, with the monopolistic tendencies found in it, cannot 

be justified as a necessary or even appropriate remedy for the special 

and narrow evil found in pornography. 16 

The court rules the Act unconstitutional because it impairs "vested 

rights" under Article III, section 3, and violates due process, under 

Article III, section 27 of the Montana Constitution. Granting that 

there is much room for a difference of opinion as to how far courts 

should go in striking down purported social legislation, it should be 

worthwhile for the reader to evaluate this particular case in the light 

of our three criteria for judging acceptable regulatory legislation. 17 

PHARMACY CODE 

The business involved in the second of these cases, the dispensing 
of drugs and the practicing of pharmacy, without question may be 
extensively regulated. But even here, there are limitations on the 
character and extent of regulation which is constitutionally permis- 
sible, as shown in our leading case decided in 1936. 18 It is not the 
extensive provisions licensing and regulating the preparation and 
dispensing of drugs contained in Montana's Pharmacy Code which 
are under attack in this case, but rather the attempt to prohibit the 
sale of certain medicines in the original package by any business 
except one operated by a licensed pharmacist 19 (even though the 
pharmacist himself was not chargeable in any way with responsi- 
bility for the quality of such articles sold in the original package) . 20 

15 Id., at 532. 

m Id., at 533. 

n Supra, page 9. 

ls State v. Stephens, 59 P 2d 54 (1936). 

n "RCM 1921, sections 3170, 3181, and LAWS OF MONTANA 1931, Ch. 104. 

-°RCM 1921, section 3184, RCM 1935, id. 

11 



The defendant had been convicted of violating these provisions 
by selling aspirin in the original package, as a retail grocer, without 
a license to sell or dispense drugs as required by the Act. 21 Noting 
that there was conflicting authority regarding the constitutionality 
of such regulations, the Montana court decided, after examination 
of this conflicting authority, that those cases ruling such provisions 
unconstitutional inquired more realistically and discriminatingly 
into the question of whether there was any relationship between the 
requirement that only druggists be allowed to sell patent, proprie- 
tary, and original package drugs and maintaining of the public 
health.-- Concurring with their finding of no such relationship, the 
Montana Court ruled the Act unconstitutional on this point. 23 The 
rationale for its decision is taken from a leading Illinois case which 
states it thus: 24 

The vice of the present pharmacy act is that it gives to the registered 
pharmacists the exclusive privilege of selling these patent and proprie- 
tary medicines and remedies, and excludes all other persons from 
doing so, while at the same time it makes no requirement of such 
registered pharmacists that they make any analysis, inspection, or 
examination of the same. In this regard the act gives to registered 
pharmacists a monopoly of the business of selling patent medicines, 
without in any manner protecting the public health. 

A postscript of this 1936 decision is found in Pike v. Porter, 25 de- 
cided in 1953. In 1939, the legislature amended the Pharmacy Act 
so as to prohibit any store without a licensed pharmacist from using 
the word "drugs" or "drug store" in its business name. 20 In the Pike 
case, the plaintiff operated the "Superior Drug Store," handling a 
variety of lines, including household drugs, but did not employ a 
pharmacist. When Pike applied for a license from the Pharmacy 
Board, in pursuance of section 66-1525, RCM 1947, the license was 
refused on the ground that Pike was violating the law in using the 
name "drug store" for his business. 27 Pike brought an action to 
review the Board's refusal, and on a judgment for the latter, ap- 
pealed. The Supreme Court reversed, ruling for the plaintiff. Noting 
that the Pharmacy Act now provides that: 

. . . nothing in this act shall prevent the sale of common household 
preparations and other drugs, provided stores selling same are li- 
censed under the terms of this act, 



"RCM 1921, sections 3170 and 3181. The controlling effect of this decision as 
precedent may be weakened somewhat by the fact that the parties stipulated 
that, for the conviction to be sustained, the court must find that the statutes 
were a valid exercise of the police power, tending in some manner to promote 
or preserve public health under the due process clauses of the federal and 
state constitutions. State v. Stephens, 59 P 2d 54, 55 (1936). 

"Ibid., 58. 

-"Ibid. 

"Id., 57. 

-'Pike v. Porter, 253 P 2d 1055 (1952, 1953). 

a! LAWS OF MONTANA 1939, Ch. 175, section 11, RCM 1947, section 66-1522. 

- 7 Pike v. Porter, 253 P 2d 1055 (1952). 

12 



the Court found that the statutory provisions permitting only phar- 
macists to use the word "drugs" in advertising household drugs bore 
no reasonable relationship to the protection of human life, health or 
safety, but merely discriminated in favor of a certain class, and 
were, in consequence, unconstitutional and void.- 8 Quoting approv- 
ingly the same statements from the Illinois Court used in State v. 
Stephens, 29 it declared the proposition that "The Act gives to regis- 
tered pharmacists a monopoly of the business of selling patent medi- 
cines, without in any manner protecting the public health," was 
equally applicable to the attempt in the present Act, as amended, 
to restrict the use of the words "drugs" and "drug store," and dis- 
approved this attempt for the same reason. 30 

MUNICIPAL ORDINANCE 

The third case, City of Missoula v. Swanberg; u actually puts in 
issue the validity of a city ordinance 32 prohibiting the use of wrought 
iron in the plumbing of any house with less than three stories, 
though permitting it in those with three stories or more. The prac- 
tical result was that much more hand labor in the form of lead work 
was required. The case illustrates competition between product 
and individual labor. The defendant appealed from a conviction for 
having violated that ordinance. Granting that, in the exercise of 
the state's police power, much regulation in protecting the public 
health is constitutionally permissible, the Court could not find any 
possible relationship between the character of the prohibition im- 
posed here and the maintenance of public health. 33 If the wrought 
iron were adequate in three-story buildings, it must be adequate in 
two-story buildings. It ruled that the ordinance was unreasonable 
"class legislation" and that it violated Article V, section 26, of the 
Montana Constitution. 34 The reasoning of this case would be equally 
applicable to legislative action by the state as well as by its political 
subdivisions. 35 



28 Id., 1056, RCM 1947, section 66-1508. 

2!, State v. Stephens, 102 M. 414, 59 P 2d 54, 57, quoting Noel v. People, 187 111. 
587, 58 N.E. 616, 618. 

3 "Pike v. Porter, 253 P 2d 1055, 1056-57 (1953). 

•"City of Missoula v. Swanberg, 149 P 2d 248 (1944). 

y -The ordinance involved, as given in Ibid., at page 248, is City of Missoula 
Ordinance No. 496-A, providing in part that, "Wrought iron and galvanized 
iron work (commonly known as 'Durham Work') is prohibited in all build- 
ings having two stories or less above ground. In buildings having more than 
two stories above the ground, . . . (Durham) work may be installed." 

'^Op. cit., supra, note 31, at 249. 

■"Ibid. CONSTITUTION OF MONTANA, Article V, section 26 prohibits the 
passing of "local or special laws." 

'^Ibid. The court relies heavily on a Washington case, identical in the ordinance 
involved and the controlling facts, and reaching the same conclusion: City 
of Spokane v. Latham, 181 Wash. 161, 42 P 2d 427, 428. 

13 



TRADING STAMP TAX 

A recent case, decided after this chapter was originally written, 
is of special interest at this point, both because of the very important 
issue involved, and because it continues to rely quite heavily on the 
legal principles controlling the cases discussed above. Moreover, it 
also impinges on the problem of direct "price supervision and regu- 
lation," under the Unfair Practices Act, discussed in Chapter IV. 

In Garden Spot Market, Inc. v. Byrne, 3(i the Montana Supreme 
Court ruled unconstitutional, under the due process and equal pro- 
tection clauses, a 1961 Act" imposing a confiscatory tax on trading 
stamps, for the presumed purpose of prohibiting their use, though 
not formally so framed. It reveals a continuing readiness by the 
Montana Supreme Court to exercise a greater amount of judicial 
discretion in passing on the constitutionality of economic legislation 
under the state's general police powers than has the United States 
Supreme Court recently. Among several cases which it cites ap- 
provingly, it relies especially heavily on State v. Gleason* 8 ruling 
void the Photographic Examiners Act, discussed above, and Brack- 
man v. Cruse™ ruling unconstitutional the oleomargarine tax. All 
of these cases affirm the proposition that: 40 

While it is true that the police power of the state has an ever widen- 
ing horizon, it is equally true that its exercise is still under the control 
of the principles of constitutional law and is subject to review by the 
courts. . . . 

This case is the more significant, in that it grants that, many 
years ago, the United States Supreme Court had ruled otherwise 
in a series of three cases, upholding the prohibition of redeemable 
devices promoting sales, 41 but it concludes that a large majority of 
state decisions has refused to follow those cases. Finding that only 
one case, a 1961 Wyoming decision, 42 has upheld the constitutionality 
of statutes prohibiting trading stamps since 1919, it points out that 
the Montana Act is distinguishable from all others in that it is much 
broader in its prohibitions than any other act, subjecting to the 
prohibitive tax not only trading stamps redeemable in cash, but a 
large variety of non stamp redeemable devices as well. Further, as 
it points out, the leading United States Supreme Court cases ex- 
pressly stated that they did not express any opinion on the consti- 
tutionality of an act which would prohibit the redeeming of trading 

;m Mont., 378 P 2d 220 (1962). 

a7 LAWS OF MONTANA 1961, Ch. 153. 

3 ' Supra, note 11. 

3l, 128 Mont. 91, 199 P 2d 971 (1948). 

M Supra, note 14. 

41 Tanner v. Little, 240 U. S. 369 (1916); Rast v. Van Deman & Lewis Co., 240 

U. S. 342 (1916); Pitney v. Washington, 240 U. S. 387 (1916). 

4:i Steffey v. City of Casper, 357 P. 2d 456 (Wyo. 1961). 

14 



stamps, either in cash, or by discounts or credit, as did the Montana 
Act. In rejecting the Wyoming case, it points out both that though 
the Wyoming Act prohibited trading stamps, its prohibitions were 
much narrower than Montana's, 43 and also that the Wyoming Court 
assumed a state of facts showing "coercion" by the trading stamp 
companies, which is not present in the trial record in the Montana 
case. 44 

SUMMARY 

In terms of their impact on competition, the regulations involved 
in these cases may be summarized as follows: The Photographers' 
Code attempted to restrict "entry" competition; the Pharmacy Code 
attempted to restrict competition between outlets — a specialty versus 
a general outlet; the Missoula ordinance attempted to restrict the 
use of a product in favor of labor — "product versus labor" competi- 
tion; and though nominally a revenue producing measure, the Trad- 
ing Stamp Tax Act actually intended to prohibit the use of trading 
stamps and similar promotional devices. Without passing judgment 
on how readily or how far, generally, courts should go in ruling 
so-called "social legislation" unconstitutional, we are interested in 
examining these cases to determine to what extent they have con- 
tributed to the general ideal, which we have adopted, of approving 
legislation which attempts to provide a specific remedy for a par- 
ticular evil in our economic system, without allowing that remedy 
to impinge on other areas not affected by the evil and without 
approving remedies for alleged evils which in fact do not exist. 
Our Court continues to give much the same judicial treatment to 
other important cases in this area, but we shall examine them later 
in connection with our study of the Unfair Practices and Fair Trade 
Acts. 

The remainder of this study will be devoted principally to regu- 
lations restricting "price competition" in one way or another, and 
to an analysis of the five codes described above regulating and re- 
stricting that competition, in the following order: 1. The Unfair 
Practices Act; 45 2. The Fair Trade Act; 40 3. Barbers and Barber 
Shops Code; 47 4. The Beauticians' Code; 48 5. The State Milk Control 
Act. 40 They are considered in this sequence, according to the degree 

43 Supra, note 36, at 231. 

4i Ibid. 

W RCM 1947, sections 51-101 to 51-118. It is interesting to note that this Act 
is classified under Title 51 — Monopolies. 

46 RCM 1947, sections 85-201 to 85-208, the second chapter, in Title 85— Trade- 
marks. 

47 RCM 1947, sections 66-401 to 66-412, as amended. 

4S RCM 1947, sections 66-801 to 66-818, Cosmetology. 

4i 'RCM 1947, sections 27-401 to 27-428. 

15 



to which they adopt and implement the principle of "administered 
prices." Acts 3, 4, and 5 frankly embrace that technique, utilizing 
a government agency to do so. The Fair Trade Act actually affirms 
the same principle, though proposing rather to give legal protection 
to a system of administered prices based on contract. And even with 
the Unfair Practices Act, one of the more persistent and vexing 
questions is whether this act is not so framed as to permit the 
operation of administered prices without formally subscribing there- 
to, or admitting it. 



16 



Chapter III 

Legislative History of Commissions 

Administering Unfair Practices 

and Fair Trade Acts 

INTRODUCTION 

Not one of the busineses or occupations regulated by the five 
Acts just listed is remotely related to the fields which we have 
come to think of as ''natural" or "quasi" monopolies. Notwith- 
standing this, at first the Montana legislature tried to link such 
regulations to the public utility field by vesting the power to ad- 
minister the first two 1 above Acts, particularly, in the agency which 
has always regulated utilities — the Railroad Commission. Prelimi- 
nary to studying the administration of those Acts, a summary of 
this development historically should be helpful. 

HISTORY OF STATE REGULATORY AGENCIES 

Montana's first venture into the utility regulation field apparently 
occurred in 1907, when the legislature created the Railroad Com- 
mission to regulate intrastate railway transportation. 2 (In 1931, 
this was expanded to include motor transportation as well.) 3 Of 
course, there was adequate precedent and authority for this step 
in both federal and state practice. In 1913, the legislature created 
the Public Service Commission to regulate public utilities generally, 4 
but provided that the Railroad Commission should act ex officio 
as such Commission, 5 thus expanding the jurisdiction of the Rail- 



'LAWS OF MONTANA 1919, Ch. 223, section 1, created the "Federal Trade 
Commission," but designated the "Board of Railroad Commissioners," to serve 
ex officio, as the Trade Commission. LAWS OF MONTANA 1937, Ch. 80, 
section 12, vested the responsibility for administering the Unfair Practices Act 
in the Montana Trade Commission. With the "non-signer" clause repeated 
and incorporated into the Unfair Practices Act, in LAWS OF MONTANA 
1937, Ch. 80, section 1, this Trade Commission also was vested with the ulti- 
mate power to enforce the definitive part of the Fair Trade Act. 
2 LAWS OF MONTANA 1907, Ch. 37, RCM 1947, section 51-101. 
a LAWS OF MONTANA 1931, Ch. 184, RCM 1947, sections 8-101 to 8-130. 
'LAWS OF MONTANA 1913, Ch. 52, section 1, RCM 1947, section 70-101. 
'Ibid., section 2 and section 70-102. 

17 



road Commission to include utilities in the state generally. In 1919, 
the legislature created the Montana Trade Commission, again ex- 
panding the Railroad Commission's jurisdiction by decreeing that 
it should serve ex officio as this Commission. 7 

Judging from appearances, it might seem, therefore, that as early 
as 1919 our legislature attempted to tie in the regulation of business 
and trades generally with the utility field. However, this particular 
extension of the Railroad Commission's jurisdiction was not as ex- 
treme as the Trade Commission's name might imply, because origi- 
nally the Montana Trade Commission's jurisdiction was limited to 
the regulation of mills and elevators — a type of regulation receiving 
full constitutional approval as long ago as Munn v. Illinois, 8 per- 
mitting them to be treated as a "quasi-monopoly" and utility. More- 
over, grain elevators may readily be classed as a link (storage) in 
the transportation of grain from field to consumer, and often are 
an adjunct to a railroad. 

In 1939, however, the legislature created the State Board of Food 
Distributors 9 to license, supervise, and regulate all food stores. 
Under this legislation, the Railroad Commission retained the juris- 
diction of the Trade Commission. 10 However, in 1943, the State Board 
of Food Distributors was made, ex officio, the Montana Trade Com- 
mission; 11 i.e., the jurisdiction of that Board was tranferred from 
the Railroad Commission to the State Board of Food Distributors. 
So far as the principal Act creating the Trade Commission was 
concerned, its jurisdiction continued to be the regulation and super- 
vision of mills within the state. But, as we shall see shortly, other 
special pieces of regulatory codes were added to the jurisdiction of 
the Trade Commission and thus to that of the State Board of Food 



3 LAWS OF MONTANA 1919, Ch. 223, section 1. 
'Ibid., section 12. 
'94U. S. 113 (1876). 

"LAWS OF MONTANA 1939, Ch. 49, section 2, RCM 1947, 27-302. 
11 Although there was no formal transfer of Trade Commission jurisdiction to 
the State Board of Food Distributors at this time, even this early there was 
a much closer relationship between the latter Board and the Unfair Practices 
Act than appeared on the surface. Writing in 1942, George W. Peck tells us, 
in his Administration of the Montana Unfair Practices Act, 15 JOURNAL 
OF BUSINESS, 140-159, that the license fees collected from food stores by 
the Food Distributors Board actually were used in large part to enforce the 
Unfair Practices Act, under the provision contained in section 14 of the Act 
that not less than one-half of the total fees must be paid over to the "Montana 
State Food Distributors Association," a private trade association, "for the 
enforcement of this or any other law [emphasis added] relating to food stores." 
Ibid, 150-151. 

I] LAWS OF MONTANA 1943, Ch. 123, section 1. This overtly established the 
close relationship between the trade associations and the enforcement of the 
Unfair Practices Act, since, in practice, the officers of the private association 
and members of the State Board of Food Distributors were the same at this 
time, the same person serving as secretary of both. PEAK, op. cit. supra, note 
10, at 151. 

18 



Distributors, particularly in the field of price regulation. This is 
the more interesting in view of the fact that the Food Distributors' 
Code expressly required that the Board's membership be taken from 
the grocery trade itself, the trade which that Board was authorized 
to regulate. 12 Although it is claimed that the Fair Trade Act and 
the Unfair Practices Act, both administered by the State Board 
of Food Distributors acting as the Montana Trade Commission, were 
sponsored by the Montana trade associations, 18 no official data docu- 
menting that claim have come to my attention. 



"LAWS OF MONTANA 1939, Ch. 49, section 2. 

J3 Peak is especially critical of the "State Board of Food Distributors Act" regu- 
lating the licensing of food stores, on two grounds: 

1. The stated purpose of inspecting food stores, using the federal Pure Food 
and Drug Act as the standard, is a misrepresentation, because the real pur- 
pose is to enforce minimum price legislation; 

2. The State's power to levy fees for licenses is being used by private asso- 
ciations for the purpose of enforcing legislation for which administrative 
provision has been made elsewhere, both because the Board of Food Dis- 
tributors was the main complainant before the Trade Commission, and 
because the licensing fees were divided so as to assure a private association 
of not less than one-half thereof, to facilitate its informal aid in enforcement. 

But this latter provision requiring fee division, found in section 14 of the 
original Act, was declared unconstitutional in Cramer v. Montana State Board 
of Food Distributors, 113 Mont. 450, 452, 129 P 2d 96 (1942), under Article 
XIII, section 1, prohibiting the state from making any "donation or grant, . . . 
to any individual, association or corporation." 

19 



Chapter IV 
The Unfair Practices Act 



INTRODUCTION 

Montana's Unfair Practices Act deals with some three quite diver- 
gent areas of trade practices: 1. Locality price discrimination and, 
to some extent, customer price discrimination; 2. Resale price main- 
tenance, imposed on third persons having knowledge of such price 
maintenance agreement, but not parties to it; 1 3. Broad provisions 
prohibiting, generally, "sale below cost" practices. 2 This last area 
covers the entire range of production and sale of goods and services, 
even though those principally interested in its administration, to 
date, have been grocery merchants and their associations. 

A Robinson-Patman type of regulation, the locality price discrimi- 
nation prohibition deals with conduct which traditionally has been 
directly associated with monopolistic practices, and generally pro- 
hibits selling at a lower price in one area than in another. The only 
proceeding taken by a state agency in this area in Montana was 
against the oil industry,' 5 in the belief that it was maintaining a 
monopolistically high level of prices. This portion of the Act does 
not appear ever to have been used otherwise in Montana. At the 
other extreme, the prohibition of sale below cost practices is based 
on a theory of ruinously low prices. 

The second area dealt with by the paragraph on resale price main- 
tenance operates as an exception to the general prohibition against 
administered prices by affirming the policy of allowing a manufac- 
turer or producer of a trade-marked product to administer retail and 
wholesale prices, in effect, by imposing a fixed minimum price as a 
condition of its sale. This statute legalizes an otherwise illegal agree- 
ment to fix prices, generally violating state and national anti-trust 
policies. 

The common denominator found in these three diverse areas is 
that the legislature considered them all differing manifestations of 
unfair competition and thus within the subject matter of this "Unfair 
Practices Act." Professor Coad's criticism of the inclusion of the 



'RCM 1947, section 51-101. 
-Ibid., second paragraph. 
Id., section 51-103. 



20 



"fair trade" provision 4 in his very excellent 1950 study of Montana's 
Unfair Practices Act, on the ground that "it was not pertinent" to 
anti-discrimination, may therefore be questioned. However, this 
section is repeated verbatim in Montana's Fair Trade Act, r> and since 
it is one of the most controversial sections in that Act, it will be 
considered in that connection below.' 1 Neither shall we examine in 
detail the locality discrimination clause, since it has no adminis- 
trative history. Even the investigation of the oil industry, referred 
to above, and the authority on which the Montana Trade Commission 
acted, springs primarily from two other statutes. RCM sections 60- 
401 through 60-407, regulating the petroleum industry generally, 
contain an anti-locality discrimination provision, 7 and the bill appro- 
priating $20,000 for this investigation designated the Trade Com- 
mission expressly as the investigative agency for that purpose. 8 
(Apparently, it originally was assumed that the Attorney General's 
Office was the natural investigative agency for this purpose.) 1 * The 
position of the filling station operator will be considered later, to 
some extent. Hence the following discussion is limited to area num- 
ber three above: Broad provisions prohibiting, generally, "sales 
below cost" practices. 

GENERAL PROVISIONS REGULATING PRICES 

For convenience of analysis, the provisions prohibiting "sales be- 
low cost" in the Unfair Practices Act may be divided into three 
parts: 1. Those sections describing the sales practices which are 
prohibited, with stated limitations and exceptions; 10 2. Those speci- 
fying who is to sue under the Act, and the parties defendant subject 
thereto, and the remedies and penalties provided for by the Act; 11 
3. Those provisions empowering the Montana Trade Commission 

'Though this proceeding, discussed below, was undertaken by the state Trade 
Commission, it was based on special legislation, rather than the Unfair Prac- 
tices Act. 

r, Coad, Are Montana's Price Fixing Statutes Valid?, XI MONTANA LAW 
REVIEW, 21, 29 (1950). 

6RCM 1947, section 85-206. 

7 RCM 1947, section 60-401: "Any person . . . that shall demand or collect from 
any person ... a higher price for any standard petroleum product in one part 
of the state . . . than the price being demanded ... at substantially the same 
time by such person, . . . from other persons ... in another part of the 
state . . . shall be guilty of a discrimination which is hereby declared to be 
a fraud. . . ." 

S LAWS OF MONTANA 1955, H. B. No. 418 (App. Bill). 

n The especially strong opposition of the oil industry, at this time, to the policies 
of the Attorney General's Office relating to the leasing of state lands for oil 
and gas may have influenced the decision to direct the Trade Commission to 
make this investigation. 

,U RCM 1947, sections 51-103, 51-107, 51-108, 51-116. 

u Ibid., sections 51-102, 51-105, 51-111, 51-109, 51-110, 51-112. 

21 



to administer the Act and elaborating on its powers in pursuance 
thereof. 12 

Prohibited Sales Practices 

In the first category of provisions, the Act makes it unlawful to 
sell at less than cost as defined in the act, 18 or to give away any 
article, product, or service. 14 Distribution cost is defined as "invoice 
or replacement cost, which ever is lower" plus "all costs of doing 
business" apportioned to the goods in issue; 15 production cost in- 
cludes the cost of raw materials, labor, and all overhead expenses. 
However, by the Act's expressed terms, merely selling below cost is 
not of itself a violation; in addition, the one complaining must show 
that the seller so sold "for the purpose of injuring competitors and 
destroying competition." 1 ' 1 Thus the formal conditions to finding a 
violation are two-fold: 1. Selling below cost; 2. Intent to injure and 
destroy. 

However, the Act excepts five general classes of transactions from 
its application: 17 1. A good faith close-out of any or all of inventory; 

2. Sale of damaged or deteriorated goods with notice to the buyer; 

3. Sale by court order; 4. Sale in an effort in good faith to meet a 



,2 Id., sections 51-113, 51-114, 51-115, 51-117. 
J3 RCM 1947, section 51-103. 

1+ 7d. The Attorney General gave a number of opinions interpreting the Unfair 
Practices Act almost immediately after its original passage. One of the early 
ones, issued in November 1937, interpreted the provision prohibiting "gifts" 
by any person, subject to the Act. He ruled that, 
This [the relevant provision] cannot be taken to mean an absolute prohibi- 
tion against giving of free gifts or premiums ... in order to have a violation 
of this portion, the free gift or premium given away must be given with the 
intent to injure and destroy competition, and the value of the premium must 
be such that added on to the article makes it a sale below cost. (Emphasis 
added.) 
Thus, practically from its inception, those interpreting the Act's scope have 
stressed both the "below-cost" and the "intent to injure" requirements. This 
opinion seemingly considers the second condition necessary to hold the Act 
constitutional. 17 MONT. A.G.O. 232-233 (Op. No. 192, Nov. 1937). In the 
related field of anti-price discrimination, under the Robinson-Patman Act, 
Edwards notes that Congress has taken great care to leave adequate scope 
"for the encouragement of efficiency in distribution by safeguarding all price 
differences that were based on cost differences." Edwards, THE PRICE 
DISCRIMINATION LAW (1959). 

i:, RCM 1947, section 51-103. Actually, such apportioning is not expressed, but 
must be implied. Although trade discounts may be deducted from invoice, 
customary cash discounts given for quick payment may not be so deducted. 
This section tries to detail all of the expense items required by a complete 
cost accounting procedure, in describing cost of doing business. 
'"Id. A primary conflict in the opposing views as to the scope of the Act, since 
its enactment, has involved the question of to what extent this second intent 
requirement should be deemed to limit the jurisdiction of the Act — or liability 
under the Act. This has been true not only in Montana but in other states 
as well, as we shall see. 
17 RCM 1947, section 51-107. 

22 



competitor's legaV 8 prices; 5. Sale to the State of Montana, added 
by amendment in 1941. 1!) Not surprisingly, all rebates, refunds, un- 
earned commissions or discounts, or other such devices calculated 
to evade the Act's prohibitions are expressly made unlawful, 20 as is 
the alteration of any invoice or other record, if it "tends to injure 
a competitor, destroy competition, or mislead either court or Com- 
mission."- 1 

Persons Entitled to Sue and Penalties 

Not only is any person (i.e., legal personality) found violating the 
Act liable under it, 2 - but anyone acting as an agent for such a person 
is likewise guilty 2:1 — and proof of the principal's unlawful intent is 
all that is necessary to charge the agent, for the principal's intent is 
imputed to the agent. 24 Any person, firm, corporation, public or 
private, or trade association including the Trade Commission, may 
sue to enjoin violations of the Act, whether personally damaged or 
not; 25 if they can show damage, they also are entitled to "three times 

lf The application of this defense, i.e., meeting another's legal prices, has caused 
trouble everywhere. Apparently, in its early administration, Montana's Com- 
mission assumed that everybody is guilty in a price war. See Peak, Adminis- 
tration of the Montana Unfair Practices Act, 15 JOURNAL OF BUSINESS 
140, 149, n. 24. Peak himself, however, insists that the opposite presumption 
must control when the clear statutory defense is combined with the near 
impossibility of proving who started a price war. Id., 157. 
)! 'Many criticize or at least question the provision, section 51-107 (e), exempting 
the state from the Act's application. Peak, loc. cit., supra, note 18, at 156-157, 
says that it can be only because either prices under the Act admittedly will be 
too high or the state cynically is willing to contribute to unfair competitive 
conditions, contrary to its expressed purposes. Of course, neither reason jus- 
tifies the exemption. He is sure that the provision is political, tactical, and 
moral dynamite. However, the earliest Attorney General's opinion inter- 
preting the Unfair Practices Act may have some bearing on this question. 
In May 1937, when this exception was not expressed, the State Purchasing 
Agent asked for an opinion on whether state purchasing contracts should 
continue to be issued to the lowest responsible bidder, as required by RCM 
1935, section 293.3. Ruling that the latter section had not been repealed by 
implication and so continued to govern, the opinion added: 
Repeals by implication are not favored and we do not think that the legis- 
lature intended that the state of Montana, which purchases supplies and 
equipment in wholesale quantities, should be placed in the same class as the 
buying public. 
This view was confirmed in the Act by LAWS OF MONTANA 1941, Ch. 100, 
section 1. 17 MONT. A.G.O. 108 (Op. No. 100, May 1937). 
'"RCM 1947, section 51-108. 
-'RCM 1947, section 51-116. 
"RCM 1947, sections 51-102 and 51-105. 

2 nud. 

-'Id. 

~RCM 1947, section 51-111. Though obvious only on careful reading, there is 
an unfortunate omission of words in this section, resulting in ambiguity as to 
its meaning. It reads, "Any person, ... or trade association, may maintain 
an action to enjoin a continuance of any act or acts in violation of sections 
51-101, 51-108, inclusive, if injured thereby, for the recovery of damages." 

23 



the actual damages." 26 Moreover, any contract violating this Act is 
illegal and cannot be enforced in any way. 27 And, upon the third 
conviction of a corporation for a violation of the Act, "it is the duty" 
of the Attorney General to bring a proper action to have cancelled 
the corporation's charter, and to enjoin it from ever transacting any 
further business in Montana; 28 the Court, however, has a discretion 
to enjoin permanently, or "for such time as the Court shall order." 29 
The Act also makes any violation a misdemeanor, with a $100-$1,000 
fine, and/or not exceeding six months jail sentence. 80 

Trade Commission Membership and Powers 

When this Act was passed, and at least for some years thereafter, 
Montana apparently was the only state providing for an administra- 
tive agency especially commissioned to administer its Unfair Prac- 
tices Act (California still has no such agency) , 33 This fact attracted 
some national attention to the Montana Commission's administration 
of the Act, resulting, in 1942, in the special study by Mr. G. W. Peak, 
which was published in the University of Chicago's JOURNAL OF 
BUSINESS. 82 This study gives a substantial amount of information 

As originally enacted in LAWS OF MONTANA 1937, Ch. 80, section 10, this 
section read thus: "Any person, ... or trade association, may maintain an 
action to enjoin a continuance of any act or acts in violation of Sections 1 to 7, 
inclusive, of this act and, if injured thereby, for the recovery of damages." 
The omitted words are those in italics. This Act's model, the California Act, 
also contains this wording. Clearly, those named should not have to show 
personal damages to support an action for injunction. The section does not 
make sense as it is worded. 
"Ibid. 

27 RCM 1947, section 51-110. 
LS RCM 1947, section 51-109. 
w Ibid. 

3U RCM 1947, section 51-112. 

31 In his Developments Affecting Cost Under the Unfair Practices Acts, 13 
JOURNAL OF BUSINESS 118-135, Tannenbaum credits Utah with providing 
such agency, though inadequately articulated. Although its Unfair Practices 
Act, as set forth in UCA 1953, sections 13-5-1 to 13-5-18, makes no such pro- 
vision, in 2 UCA section 13-2-1 to 13-2-25 Utah's Trade Commission is created 
and its powers are set forth. In section 13-2-10, it is made the administrative 
agency, not only for Utah's Unfair Practices Act, but also for its Fair Trade 
Act and its Barber's Price and Hour Act. 

''■Cited supra, n. 18. Mr. Peak is a member of a firm of consultants in public 
administration and finance with offices in Chicago, Illinois. Hereafter, his 
study will be cited as "PEAK," with relevant page. Peak is almost fulsome in 
his praises of the Montana Trade Commission's administration in its first five 
years, particularly with its very limited resources. He notes that the Com- 
mission had only one full time inspector (148); that it had stopped several 
price wars by stipulation, and greatly lessened local price wars generally; 
that it had established thirteen "cost schedules," and had not held more hear- 
ings only because of cost (147); that it was working aggressively to develop 
an adequate administrative procedure before it (150). But this approval was 
of the State Board of Railroad Commissioners, which he considered impartial. 
He was very critical of the State Board of Food Distributors and would be 
even more so of the Act later making that Board ex officio the Trade Com- 
mission. 

24 



on the Act's administration in its early years. 

Preliminary to an examination of the powers vested in the Trade 
Commission by this Act, it is well to recall the composition of that 
administrative agency. 83 When the Unfair Practices Act was first 
passed in 1937, as pointed out above, the Montana Trade Commission 
actually was the Railroad Commission, an elected agency, acting ex 
officio. In 1939 the legislature created the State Board of Food Dis- 
tributors, composed of three members appointed by the governor 84 
from a panel of fifteen grocers with at least five years continuous 
experience in the state 85 nominated by the Montana Food Distrib- 
utors' Association. 36 Further, a condition to such membership is that 
they continue in the grocery business; 87 the moment they become 
inactive they automatically are disqualified from Commission mem- 
bership. 88 

The Unfair Practices Act covered much more than the grocery 
business, but when the powers of the Trade Commission were trans- 
ferred from the Railroad Commission to the State Board of Food 
Distributors, in 1943, three men picked for their experience as 
grocers became the administrators of this extremely wide ranging 
Act. 89 There is reason to suspect that there survived much of the 
philosophy behind the old NIRA, i.e., the regulation of business and 
trades by business and trades themselves, in the requirement that 
the membership of the Food Distributors Board be selected exclu- 
sively from active operators in that field. 

Although the Montana Trade Commission was designated as the 
agency to administer the Act, originally it was given no express 
administrative or enforcement powers. But the 1947 decision of the 
Montana Supreme Court that the Photography Board, which had 
been given extensive power to regulate that business by examina- 
tion and licensing, nevertheless had no implied power to enforce the 
regulatory Act's provisions 40 fully justifies the fear which developed 
early that the Montana Supreme Court might refuse to find any 
implied powers in the enforcement agency to enforce effectively the 
Unfair Practices Act in the courts, simply because it was the desig- 
nated administrative agency thereunder. So, by amendment in 1939, 
shortly after the Act's passage, not only was the Commission ex- 
pressly empowered to prevent any violations of the Act, but a 



: ' 3 Discussed in Chapter II, supra. 
U RCM 1947, section 27-302. 
sr 'Ibid., section 27-302. 
"Id., section 27-304. 
* 7 Id., section 27-303. 
™Id. 

M LAWS OF MONTANA 1943, Ch. 123, section 1, RCM 1947, section 70-201. 
'"Montana State Board of Examiners in Photography v. Keller, 120 M. 364, 
185 P 2d 503 (1947). 

25 



detailed procedure for hearing complaints, making findings thereon, 
and issuing cease and desist orders for enforcement of the Act 41 was 
spelled out, subject only to review in the District Court, with right 
of appeal to the Supreme Court. 42 Incidental to these powers to hold 
hearings, the Commission also was given the power to issue sub- 
poenas, to administer oaths, and to compel the attendance of wit- 
nesses by securing court orders. 48 To the extent that the Commission 
is affirmed in the Courts, court orders are issued in further support 
of the Commission's orders, subjecting violators thereof to contempt 
proceedings. 

Also, in 1939, the Act was amended to provide a procedure for 
establishing "cost surveys" for different industries or trades for 
which the Commission holds hearings 44 on petition from ten or more 
persons from a particular trade or business. If the Commission finds 
that such cost surveys should be made, in the same hearing it is to 
take evidence to establish what the costs should be and the area 
governed thereby, measured by the "most efficient" operator for 
that area. 4 "' Furthermore, such determined costs "shall be presumed 
to be the actual 'cost of doing business,' and 'overhead expense,' 
within the affected area." 4(: However, special provision is made for 



41 LAWS OF MONTANA 1939, Ch. 50, RCM 1947, sections 51-113, 51-114, 51-115. 
Section 51-113 (1) declares that, "Said commission is empowered and directed 
to prevent any person, firm or corporation from violating any of the pro- 
visions of this chapter." 

'-Ibid., section 51-113 (2), (3), (4), (5), and (6), provide for the issuing of 
"cease and desist" orders by the Commission, with right of appeal to the 
District and Supreme Court, and full enforcement or reversal by the Courts. 

4: 7bid., section 51-115. 

4, LAWS OF MONTANA 1939, section 2, adding section 12A to Ch. 80, LAWS 
OF MONTANA 1937, RCM 1947, section 51-114. PEAK, 147, reports that in 
the two-year period from October 1939, to October 1941, the Commission 
made thirteen cost surveys and set that many schedules, all on a state-wide 
basis, both retail and wholesale (though, in the Sawyers case, decided in 1943, 
the Supreme Court ruled that the Commission lacked jurisdiction either to 
set state-wide cost schedules, or to regulate wholesale operations, at that 
time). The asserted "operating or production" costs ranged from two percent 
for wholesale grocery and tobacco jobbing to thirty-five percent for retail 
beer. For retail groceries, these costs were ten percent; for retail meat, 
eighteen percent; for plumbing and heating, twenty percent; for photographic 
finishing, twenty-five percent; for apples, seventy-five cents per box (set by 
the growers). 

The following indicates the surveys under which, presumably, the Trade 
Commission operates currently, taken from correspondence from the Com- 
mission's Counsel dated January 1958, and January 1961: 
There have been cost surveys conducted in the following four fields: 1. 
Wholesale grocery — cost of doing business, five percent above invoice; 
2. Retail grocery — ten percent; 3. Tobacco, wholesale — five and eight-tenths 
percent; 4. Retail drug — fifteen percent. There have been no cost surveys 
since January 1, 1958, the Board not being authorized to act on its own 
initiative. 

4, Ibid., paragraph (2). 

4,i 7d., paragraph (4). 

26 



the scheduling of costs for agricultural products. The Act provides 
that seventy-five percent of such producers in a given marketing 
area may determine the "fair price," "based upon competitive and 
other factors. " 4,ia Though this may seem to violate the constitutional 
prohibition against the delegation of price fixing powers to private 
groups, it might be sustained as the only practicable basis on which 
to establish minimum prices for such products. 

Acting on this authority, the Commission proceeded to designate 
the entire state as the proper cost area for the retail grocery busi- 
ness. 47 Following an adverse Supreme Court decision 48 in 1943, the 
Act was amended so as expressly to empower the Commission to 
find that the entire state was an "appropriate cost area," and to so 
decree. 41 ' Although originally limited to retail trade, the Commis- 
sion's power to establish "cost of doing business" as a percentage 
markup on invoice price for a given area was extended to producers 
and wholesalers in a 1949 amendment. 50 

The public policy implemented by this Act is declared to be: 51 

To safeguard the public against the creation or the perpetuation of 
monopoly and to foster and encourage competition, by prohibiting 
unfair and discriminatory practices by which fair and honest compe- 
tition is destroyed or prevented. 

Taken at its face value, this policy declaration seems to warrant, if 
not require, a construction generally which will vigorously imple- 
ment the strong anti-trust policy of the state expressed in Montana's 
Constitution 52 — in other words, a construction which will condemn 
only those practices actually monopolistic in their intent and ten- 
dency. However, this section concludes with a rather oddly phrased 



16a Two of the earliest opinions from the Attorney General's Office, interpre- 
ting the UPA, considered the definition that should be given to the term "agri- 
cultural products" thereunder. In 17 MONTANA A.G.O. 254 (Op. No. 206, Dec. 
1937), the question raised was, "When do products or commodities, originally 
governed by the present section 51-106, as agricultural products, become 
articles of commerce generally, governed by the present section 51-103?" The 
opinion's answer was, "Upon being sold by the original producer." The other 
opinion, 17 MONTANA A.G.O. 225 (Op. No. 186, Nov. 1937), raised the ques- 
tion of how butter should be classified. Its answer was that it is a "manufac- 
tured product," adding: "the answer . . . turns on the matter of the intervention 
of a processing between the natural product of the soil, and the final product 
for the consumer. . . ." 

l7 The Commission asserted such authority under section 12 A, Ch. 80, LAWS, 
1937, supra. 

JV Board of Railroad Comissioners v. Sawyers Stores, 114 M. 562, 138 P 2d 
964, 967 (1943), ruled that the Act gave no such power to the Board. It also 
ruled that the Board had no power to regulate wholesale prices. Id. 

'"LAWS OF MONTANA 1945, Ch. 21, section 1, RCM 1947, section 51-114 (3). 

""LAWS OF MONTANA 1949, Ch. 129, section 1, amended section 51-103, so 
as to define "cost" to make it clear that it extends to production and whole- 
sale costs, as well as retail; section 2 of that Act amended the Unfair Prac- 
tices Act generally, so as to delete the word "retail" wherever it has been used. 

:,i Ibid., section 51-117. 

"CONSTITUTION OF MONTANA, Article XV, section 20. 

27 



sentence: "This Act shall be literally construed that its beneficial 
purposes may be served." 53 

The broad provisions contained in section 51-103, making it un- 
lawful to sell below cost "for the purpose of injuring competitors 
and destroying competition," contain the heart of the Unfair Prac- 
tices Act. From the first, there appears to have been a strong ten- 
dency among at least some of this Act's sponsors to interpret it as 
a price fixing statute. To this end they would treat any below cost 
sale, as defined in the Act, as establishing the intent to injure and 
destroy competition, thus eliminating that requirement as a limita- 
tion on liability. 54 Further, the provisions authorizing the establish- 
ment of operating costs as a fixed percentage of invoice price, to be 
added thereto, and declaring that such findings "shall be deemed 
competent evidence to be used in proving the costs of the persons, 
firm, etc." 55 held out the possibility of making the actual costs of the 
individual firm irrelevant. Another provision which might be used 
to make any kind of price competition much less flexible and prac- 
ticable as an advertising device is the clause defining cost of doing 
business which not only includes every possible element of total 
operational costs, but seemingly requires that this full cost be appor- 
tioned strictly to every item subjected to a "below cost" charge. 50 

TWO CASES 

Notwithstanding these provisions, permitting a construction of 
the Act which would make it practically a price fixing statute, the 
two early leading Montana cases construing the Unfair Practices 
Act chose to interpret it in the light of its declared policy of fostering 
and encouraging competition rather than as sponsoring a trade re- 
straint program of any kind. This interpretation continued the 



™Ibid. I say this phrasing is odd, because standard phrasing for such a sentence 
in a declaration of policy statement is: "This act shall be liberally construed." 
Although the latter is the wording of the standard legislation which was being 
presented to legislatures generally in the thirties, and though California orig- 
inally enacted this standard Unfair Practices Act with this phrase ("literally 
construed") enacted in Statutes of California 1935, Ch. 477, they already had 
an "unfair competition code" enacted in LAWS, 1913, Ch. 276, section 7, and 
when they consolidated the UPA into the earlier one, this "literally construed" 
section was omitted, and the liberally construed section survived. Cal. B & 
P.C.A. section 17,002. Clearly, California courts have chosen a liberal con- 
struction, rather than a literal one, illustrated in certain cases discussed later. 
r>1 This interpretation is illustrated in the question the Commission asked the 
Attorney General in 1952 concerning the status of trading stamps under the 
Act, discussed below. The Act's administrative agencies in different states, 
not to mention the various trade associations, generally have taken this posi- 
tion in the past in trying to enforce such acts informally. 
55 RCM 1947, section 51-105. 

r,6 RCM 1947, section 51-114 (3) and (4), authorizes a fixed percentage of invoice 
or replacement as the presumed cost of doing business, apparently applicable 
to each individual sale. 

28 



general traditions established by the series of cases discussed above 
involving regulatory legislation in other fields and set a precedent 
for limiting the scope of the Act's jurisdiction to the evil originally 
giving rise to such legislation — below-cost selling for the purpose 
of driving competitors out of business. This is true of the first case, 
Associated Merchants of Montana v. Ormeslner? 1 decided early in 
1939, even though it upheld an injunction against the respondents 
for violating the Act. 

The Court upheld the Act's constitutionality against the charge 
of lack of due process, r,s but to do so it found it necessary, first, to 
rule that it was not a price fixing piece of legislation 5 " and, secondly, 
because it did not make it illegal merely to sell below cost, but 
required, in addition, that it be "for the purpose of injuring competi- 
tors and destroying competition"* 50 — that this was an additional spe- 
cific requirement without which no action may be brought under 
the Act. Since without the second specific requirement no action 
may be brought under the Act, 01 mere general allegations of the evils 
of selling below cost are not enough to support a conviction. 62 This 
imposed a very significant limitation on the jurisdiction of the Act, 
which was further narrowed by the emphasis the decision gives to 
its ruling that section 51-105 "simply establishes the admissibility of 
evidence of any cost survey for the particular business which may be 
available, for the locality," "' and does not "prescribe the weight or 
credibility to be given to the evidence." 04 The decision concludes 
with: 05 "If a defendant's business is, because of peculiar circum- 
stances, not fairly to be governed by the cost survey, he is privileged 
to so show. The statute cannot be condemned on this ground." And 
the controlling effect of this statute was still further narrowed by 
the very significant proposition that the statutory definitions of 
"cost" found in sections 51-103 and 51-104 are not exclusive, but 
rather intend merely to express a "rule of reasonableness" 00 — this so 
as to uphold these particular provisions against the charge of lack of 
due process. Specifically, the Court declared that it must presume, 07 

That the legislature did not intend to prescribe that the cost must be 
absolutely exact, and that it must be based upon the precise method 



r ' T 107 M. 530, 86 P 2d 1031 (1939) 

:, *Ibid., at 1035. 

: '"Loc. cit. 

w Loc. cit. 

ai Ibid. 

a 'Ibid. 

m Id., 1035. 

6i Loc. cit. 

o: lbid., 1036. 

m Loc. cit. 

01 Loc. cit. 



29 



of accounting which any one merchant might adopt, but (instead) 
meant, by "cost," what businessmen generally mean, namely, the 
approximate cost arrived at by a reasonable rule. Hence, if a particu- 
lar method adopted by a merchant cannot, under the facts disclosed, 
be said to be unreasonable, and does not disclose an intentional eva- 
sion of the law, the method so adopted should be accepted as correct. 
In other words, all that a man is required to do ... is to act in good 
faith. 

As will be seen later, this limitation on the criteria for computing 
cost is an extremely important one in certain situations. 

In summary, this initial leading decision construing the Unfair 
Practices Act established the following: 1. The Act cannot be used 
directly or indirectly to fix or regulate prices; 2. Merely selling 
below cost is not a violation of it; 3. In keeping with the Act's domi- 
nant purpose, the plaintiff must show a specific intent in the de- 
fendant himself "to injure competitors and destroy competition;" 
4. General cost formulas are never controlling in themselves, and 
the defendant can always show his costs in fact; 5. Moreover, the 
criteria which the defendant may use to establish his costs are flexi- 
ble or variable. A "rule of reasonableness" governs this question; 
hence, the defendant can compute his costs on any basis so long as 
it is consistent with his claim of good faith in doing so. 

Although the Ormesher case gave little consideration to whether 
or not the evidence in the case supported a finding of the necessary 
intent in the defendant "to injure competitors and destroy competi- 
tion," it seemingly assumed the correctness of such finding. How- 
ever, that issue became crucial in the next case, which not only 
confirmed the rulings of the Ormesher decision, but placed a rather 
heavy affirmative burden on the plaintiff to prove the illegal intent. 
As its name indicates, Board of Railroad Commissioners v. Sawyers 
Stores" 8 arose before the powers of the Trade Commission were 
transferred from the Railroad Commission to the State Board of 
Food Distributors, and is the only important case in which the Rail- 
road Commission so acted. 

The Board instituted the proceeding on its own complaint, calling 
for a hearing before that Commission to determine whether the 
defendant had violated the Act. ,J,J In pursuance thereof, the Board 
issued an order commanding the defendant grocery operator to show 
cause why he should not be ordered to cease and desist from the 
alleged violations. 70 Following hearings, and upon the issue of a 
cease and desist order, the defendant petitioned for a review of that 
order by the District Court, which set it aside. The Commission 
appealed from that judgment. 71 



114 M. 562, 138 P 2d 964 (1943), 

'Ibid., 966. 

Id. 

'Id. 



30 



To support its finding of a violation, the Commission formally 
recognized that the Act requires proof of two independent things: 
1. A sale below cost; 2. Illegal intent to injure competitors and to 
destroy competition. 72 To prove the first element, the Commission 
relied on a cost survey covering the entire state.™ Included in this, 
apparently, were expenses for operating wholesale businesses in the 
state. To prove the necessary illegal intent, the Commission relied 
on testimony of the defendant's competitors, who discussed the evils 
of price cutting generally, without dealing with any specific facts 
or relating such alleged evils to the defendant's practices. 74 The 
Court observed that, "There was no proof of any kind on which could 
be based a conclusion that there was any wrongful purpose in 
making the sales in question. " 7r> Confirming the District Court's 
judgment, the Supreme Court ruled that this evidence was not suf- 
ficient to establish either of the two conditions to liability under the 
Act.™ It further found that at that time the statute clearly limited 
the use of a cost survey strictly to one computed for the "particular 
trade or business to be affected" and "in a particular business area 
or locality in which the trade or business ... is carried on." 77 It also 
pointed out that the notice of the hearing as well as any resulting 
order must carefully delimit the area to be affected. 78 It concluded 
that:™ 

... it is only a cost survey made for the locality and vicinity in which 
the particular business is carried on that is competent as evidence of 
cost. The retail cost survey for the entire state of Montana as one 
area was not competent evidence of the defendant's cost of doing 
business at Livingston. 

It also noted that the Act makes no provision anywhere for making 
wholesale cost surveys — only retail. 80 Hence, it concluded that the 
Commission had introduced no competent evidence to establish that 
the defendant sold below cost. Although the Court relied heavily on 
the limiting provisions of the Act itself to support these conclusions, 
the following language strongly suggested that any cost formula not 
clearly related to the defendant's actual cost experience would be 
inadmissible in evidence because it would violate due process: 81 
The cost of doing business as determined by a cost survey can be 



'"Id. The complaint charged that the defendant had sold certain goods below 
cost, "for the purpose of injuring competitors and destroying competition." 
™Ibid., 967. 
''Id., 968. 
To Loc. cit. 
7f 7d., 969. 
71 Id., 967. 
~*Loc. cit. 
v lbid., 968. 
ht) Loc. cit. 
sl Ibid., 967. 

31 



competent as evidence only because of express provision of law. In 
order that such provision be valid, the survey provided for must be 
reasonable so that the rate of cost thereby determined will have fair 
application to the business affected. 

Although this was enough to defeat the action, the decision again 
stresses the fact that mere proof of below-cost sales does not estab- 
lish a violation. The intent "to injure competitors and to destroy 
competition" must be proved, and actual selling below cost is no 
proof thereof. In its own words: 82 

Proof of sales at less than cost, if that had been established by the 
evidence, would not in itself be proof of the unlawful purpose to in- 
jure competitors and destroy competition. No presumption of such 
purpose arises from the mere fact of such a sale being made. It is 
necessary to go further and show other facts and circumstances that 
would furnish basis for a conclusion of the wrongful purpose. There 
is no such evidence in this case. The testimony of the competitors 
was merely a discussion of the effect of price cutting generally. It did 
not deal with any facts. 

Thus this case strongly reinforces the principles of the Ormesher 
case, strictly limiting the scope of the Unfair Practices Act to the 
precise evils arising from conduct attempting to establish monopoly 
conditions in the market. Moreover, it makes clear that the Com- 
mission cannot be aided by any kind of legal presumptions of il- 
legality based on the bare fact of cut-price competition. 

Quantum of Evidence 

Another point concerning the general question of evidence, though 
collateral to the issues just considered, involves an interesting and 
rather important question of statutory construction. This concerns 
the weight to be given to the Commissioners' findings of fact. Sec- 
tion 51-113 (3) and (4) state that: 

The findings of the Commission as to the facts, if supported by 
sufficient evidence, shall be conclusive . . . the court may order such 
additional evidence . . . The Commission . . . shall file such modified 
or new findings, which, if supported by sufficient evidence, shall be 
conclusive. . . . 
The use of the word "sufficient" here raises the interesting question 
of whether it was used intentionally, or was erroneously substituted 
at some point for "substantial." This section provides for the pro- 
cedure to be followed in a typical administrative hearing. Historic- 
ally, the "substantial evidence rule," making the agency's findings 
conclusive if supported by substantial evidence, is a very common 
standard. This rule would limit the Court's discretion to pass on the 
adequacy of the evidence more than does the word "sufficient." At 
any rate, in the Sawyers case, the Supreme Court does not assume 
that there is any limitation on the Court's discretion imposed by this 
wording. 83 



<2 Id., 968. 

* 3 7d., 969. The Court examines very critically the character of evidence relied 
on by the Board, clearly expressing the view that both Courts are free to 
exercise their own judgment as to the sufficiency of the evidence. 

32 



TRADE PRESSURES TO ADMINISTER ACT AS A 
PRICE FIXING MEASURE 

These two Montana cases provide the principal legal framework 
for construing and administering this Act. Almost exactly ten years 
later, however, the Attorney General's Office issued an extremely 
important ruling confirming the principles found expressed in the 
above two cases. That opinion is much more persuasive for the 
matters involved than Attorney Generals' opinions often are, both 
because it rests on a careful and reasoned analysis of the two cases 
just analyzed, and because it received powerful support in general 
from the equally well reasoned opinions both of the Courts of Cali- 
fornia and of the Attorney General of that state, construing Cali- 
fornia's Unfair Practices Act, from which our own Act was derived. 

From the first, there have been substantial pressures seeking to 
give the Unfair Practices Act very nearly, if not quite, the character 
of a price fixing statute. This Act, along with the companion Fair 
Trade Act, is one of several acts which became quite popular in the 
post-depression thirties. Their immediate f orebearer was the ill-fated 
NIRA, which frankly embraced the principle of self regulation by 
industries and trades on the general assumption that price, along 
with everything else, should be regulated. Although NIRA was 
short-lived, 84 its spirit survived in these acts, which fact is attested 
to both by the fact that the authors and sponsors of the acts were 
merchants' associations 8 "* and by the fact that those same sponsors 
frequently got themselves appointed as the administrators of them. 
This is true in Montana for both Acts. 80 

Moreover, there is much, particularly in the early administration 
of the Act, lending support to Professor Coad's contention 87 that the 
real intention of the Act's sponsors was to use it as a price fixing 
device, at least in the sense of setting minimum prices without regard 
to the actual costs of the particular merchant involved. (Of course, 
the Fair Trade Act is a price fixing Act in the strictest sense.) At 
least for a time, there was reason to believe that the industry could 



Si Schechter Poultry Corp. v. U. S., 295 U. S. 495, 55 S. Ct. 837, 79 L Ed 1570, 
97 ALR947 (1935). 

85 A listing of six national retail store associations represented in the drafting of 
the Unfair Practices Act is given in Coad, Are Montana's Price Fixing Statutes 
Valid?, XI MONTANA LAW REVIEW 21, note 4 (1950). 

S6 It will be recalled that from the creation of the State Board of Food Distrib- 
utors, LAWS OF MONTANA 1939, Ch. 49, under section 14 of that Act, at 
least one-half of the food store licensing fees must be turned over to the Food 
Distributors Association, to enforce any law pertaining to food stores. Peak 
assures us that this was used largely by the Board to enforce the Unfair 
Practices Act. After 1943, the State Board of Food Distributors became the 
Montana Trade Commission, the official administrative agency for that Act. 

' 7 COAD, op. cit., supra, n. 85, at 33-34. 

33 



be largely policed under section 51-111, 88 which empowered any per- 
son, including a trade association, and, particularly, informal "repre- 
sentations" by the Montana Food Distributors Association, to en- 
force the Act's provisions interpreted as that association preferred. 
The Associated Merchants of Montana was the plaintiff in the first 
case testing the validity of the Act. In the second leading case, the 
Board of Railroad Commissioners sought to establish both the fact 
of selling below cost and the necessary illegal intent by general 
formula and legal presumptions, which the Court considered arbi- 
trary because they were not related to the defendant's business. 

Even as late as March 1953, it appears from the Attorney General's 
opinion on the use of trading stamps by merchants, which is dis- 
cussed below, that at that time the Trade Commission wanted to 
establish a below-cost violation simply by using the invoice price 
plus the markup indicated by an operating cost survey, with a con- 
clusive presumption that the defendant's illegal intent to destroy 
competition was established merely by proof of his selling below 
the cost established in this way. If such a construction of the Act 
were to prevail, the practical effect would be that the defendant must 
be found guilty of a violation merely upon evidence of his selling 
below invoice price plus a percentage markup measured by a cost 
survey covering the entire state and computed on whatever account- 
ing principles the Commission chose to utilize. This would, indeed, 
go a long way toward fixing minimum prices. Such rationale of the 
Act conflicted fundamentally with all relevant decisions of Mon- 
tana's Supreme Court, which were strongly reaffirmed by the At- 
torney General's opinion on trading stamps; nevertheless, as late 
as August 1954, nearly one and one-half years after this opinion, we 
find the Trade Commission still adhering to its original construction 
in a ruling, 89 distributed to all grocers throughout the state, to the 
effect that any merchant who gives a trading stamp with the pur- 
chase of any item that is being sold at the minimum price, measured 
by the invoice price plus the percentage increase required by the 
Commission's "cost surveys," violates the Unfair Practices Act. This 



ss Writing in the early period of its enforcement, Peak credits the trade associa- 
tions with contributing greatly to the effectiveness of the Act's enforcement 
by the then Board of Railroad Commissioners, which used only one inspector 
for the whole state. PEAK, 148. Similarly, trade associations took an aggres- 
sively active part in enforcement in California, until some of their officers 
were prosecuted and convicted by the federal government for engaging in 
illegal trade restraint practices. 

*"The Trade Commission made the following ruling, dated August 13, 1954, and 
circulated it among grocers throughout the state, over the signature of its 
Secretary-Counsel: 
. . . any merchant who gives a stamp, coupon or any script . . . which . . . 
reduces the price of the said item below the price as determined by the cost 
surveys, held by the Montana Trade Commission, violates the Unfair Prac- 
tices Act. 

34 



is a clear case of minimum pricing by formula, with the necessary 
criminal intent conclusively presumed. 

ENFORCEMENT IN OTHER STATES 

The desire and the tendency to construe these unfair practices 
acts so as to permit their administration as practically price fixing 
codes is by no means limited to the Montana Commission. For ex- 
ample, on November 24, 1953, the Utah Trade Commission distrib- 
uted the following directive to retail grocers in that state: 90 
Gentlemen: 

The Price (sic) of 2 lb. Kraft's Velveeta Cheese is being sold below 
the legal retail selling price. Also there is much question on the price 
of Clearwater Yellowtail. I am unable to find a buyer who can legally 
retail these items below the following: 

2 lb. Velveeta Cheese 88^ 

Clearwater Yellowtail 21</* 

If you are selling below the prices indicated, please have them cor- 
rected by Monday, November 30th. 

That is, this Commission determined for itself that any grocer selling 
below the price set by the Commission violated the Utah Act. 

Similarly, in the earlier years, statements by the Attorney General 
and by district attorneys in California, who are the enforcement 
equivalent of the Trade Commission in Montana and Utah, also 
showed a tendency to treat the California Act as a price fixing 
statute. 

Typical of such statements is that by California's Attorney General 

Howser, in a 1948-50 report, strongly implying that any sale at less 

than the cost of doing business was a per se violation. Referring to 

this Act as the "Fair Trade Practices Act," he declared: 91 

The law prohibits sale of merchandise at a lower figure than the cost 
of doing business. Chain operations have gone into this practice of 
selling below cost to attract trade and stifle competition — particularly 
from the smaller merchant. 

And in 1948, according to Halper, an assistant district attorney of 
Santa Clara County distributed the following directive to the grocers 
of that county: 91 ' 

90 As set forth in Halper, PUBLIC POLICY IN MARKETING: SALES BELOW 
COST PROHIBITIONS IN THE CALIFORNIA GROCERY TRADE 215, n. 2 
(1958). This is Professor Donald Gene Halper's doctoral thesis in economics, 
at Stanford University, and is published by University Microfilms, Inc., Ann 
Arbor, Michigan. This is an unusually fine study, which I find it necessary 
to rely on for field data demonstrating this Act's administration in other states, 
and for some trial court judgments in California. Hereafter cited as HALPER. 
01 Annual Report 1948-50, Attorney General of California, pp. 12-13, as given 
in HALPER, 50, n. 2. 

""'Emphasis added. HALPER, 142, n. 2, taken from California Grocers Advocate, 
May 7, 1948, p. 21. Halper states that federal antitrust officials scrutinized 
these activities of the district attorneys closely for possible antitrust viola- 
tions. Though no prosecuting attorney was charged with such violation, an 
antitrust division representative expressed the opinion to Halper that he could 
be on a sufficiently "concrete" case. Id., 143 nn. 1 and 2. 

35 



TO THE GROCERS OF SANTA CLARA COUNTY 
Gentlemen: 

At the meeting held at the Montgomery Theatre last evening, I 
requested that the retail grocer abide completely by the Unfair Prac- 
tices Act. I warned them that beginning Monday, April 19, 1948, 
every item sold must carry a markup of 10 percent over cost or re- 
placement (sic), whichever is lowest. The items include shortening, 
sugars, milks, and any item which has theretofore been 'chiseled' on. 

It is always understood that if any grocer is doing business at less 
than 10 percent over cost, they may contact me and set the prices 
accordingly. 

This letter was signed by the assistant district attorney of the 
county. It clearly uses a percentage price increase based on a cost 
survey as conclusive evidence of what the price must be, and de- 
clares that every sale below that officially set floor is necessarily a 
violation of the Act. Furthermore, as Halper notes, 93 the tendency 
in practice, if not in intent, in all attempts to enforce and to institute 
suits against alleged violators is to move against all sales below cost. 

CALIFORNIA'S UNFAIR PRACTICES ACT 

California's experience in the 1940's dramatically supports this 
last statement. In spite of an early California case 04 strongly indi- 
cating that an intent to injure probably is required in the Act to 
sustain its constitutionality, two leading grocers' associations at- 
tempted to regulate the business by establishing minimum price 
floors for the entire industry and for each grocer. 05 Almost imme- 
diately, however, federal anti-trust officers brought criminal actions 
against the associations and their officers for Sherman Act violations 
and secured convictions in two highly important cases. 90 Thereafter, 
private agencies have confined their activities largely to seeking 
amendment of the Act so as to make the maintaining of minimum 
price floors for the industry easier. 

The California Act, however, long has had certain provisions in 
it which the trade originally counted on to restrain effectively all 
"below-cost" (as determined by industry) practices. These include 
changing the "intent" requirement from "intent to injure and de- 
stroy" to "intent to injure or destroy" in 1937; 07 a flat prohibition 

"'HALPER, 205-6. 

"'Wholesale Tobacco Dealers' Bureau of Southern California v. National To- 
bacco and Candy Co., 11 Cal. 2d 634, 657, 82 P 2d 3, 17 (1938). 

"Food and Grocery Bureau of Southern California and California Retail Gro- 
cers and Merchants Association. After their prosecution these and other inter- 
ested groups have sought more restrictive legislation and have tried to get 
more aggressive enforcement from state officials. See HALPER, 54-67. 

""Food and Grocery Bureau of Southern California v. U. S., 139 F 2d 973 (CCA. 
9th 1943); California Retail Grocers and Merchants Association, et al. v. U. S., 
139 F 2d 978 (CCA. 9th 1943), cert, denied, 322 U. S. 729 (1944). 

"'CALIFORNIA'S B. & P.C.A. (Sections 17,000-17,101) section 17,043. HAL- 
PER, 59. 

36 



against all "loss leaders," without any stated requirement of intent; 98 
and a series of "presumptive rules," added to from time to time 09 and 
thus much more extensive than Montana's, calculated to make it 
easier to establish the necessary unlawful intent. 

Statutory Presumptions 

These statutory provisions include a series of cost presumptions 
calculated not only to establish the cost necessary to support a con- 
viction, but to set it at a rather high level. For example, average 
overall cost, apportioned to the particular item, presumptively is the 
cost of each such article; 100 proof of approved transportation tariffs 
presumptively establishes delivery costs; 101 if the defendant com- 
putes labor free or below the prevailing wage scale, that is evidence 
of intent to violate and his wages must be computed at the prevail- 
ing rate; 10 - materials received for a "non-computable consideration" 
must be valued at market rates; 10 "' any existing cost survey estab- 
lished by the trade is competent evidence of costs; 104 and, by recent 
amendment, if the defendant gives no evidence of costs, then six 
percent may be added to his invoice cost. 105 

The presumptions supporting a finding of his unlawful intent in- 
clude one based simply on a below-cost sale, 100 which already has 
been established by a series of presumptions, as given above, plus 
testimony, perhaps from his competitor, of the injurious effect on 
competitors, 107 and one based on such below-cost sale, accompanied 
by his payment of wages at less than the "prevailing rate of pay." 108 
In addition to these presumptions, the Act contains very liberal pro- 
visions regulating the issuing of injunctions and authorizing the 
Courts to give them a very broad scope. 109 

i,s Ibid., sections 17,044, expressly prohibiting "loss leaders," and 17,030, define 

it in various ways. HALPER, 60. 
m Id., sections 17,071-17,077. 
100 Id., section 17,073. 
,<n 7d., section 17,074. 
1,,2 7d., sections 17,075 and 17,076. 
" ,8 7d., section 17,077. 
104 7d., section 17,072. 
m ~7d., section 17,026. HALPER, 70. This six percent markup provision was 

added by amendment in 1953 as "cost of doing business" in the absence of 

proof of a different figure. 
""CALIFORNIA'S B. & P.C.A, section 17,071. 

107 That was the essence of the evidence presented in Ellis v. Dallas, 113 Cal. 

App. 2d 234, 248 P 2d 63 (1952), which was held to be insufficient proof of the 

necessary intent. It will be recalled that Montana reached the same result in 

Board of Railroad Commissioners v. Sawyers Stores, Inc., 114 M 562, 138 P 

2d 964 (1943). 

^CALIFORNIA'S B. & P.C.A., section 17,075. 
lon 7d., sections 17,078-17,081. The extreme scope given to its use in these sections 

violates basic principles governing its proper use and scope. The same kind 

of free wheeling use of the injunction in the management-labor field has 

37 



Loss Leaders — No Quantity Limit 

In addition to these restrictive provisions incorporated into the 
Act, a device first enacted by municipal ordinance in the early 
thirties 110 recently has been revived. It is known as the "no quantity 
limit" law. 111 Prohibiting any merchant from placing any limit on 
the allowable quantity of any item sold below cost, it obviously is 
directed specifically at loss leader practices. In California, this 
ordinance was speedily ruled invalid. 112 Nevertheless, though it has 
not yet been enacted into law (as of January 1, 1959), considerable 
interest has been shown by different trade groups in such legislation, 
according to Harper. 118 It is his judgment, however, that unless lim- 
ited by the additional requirement of monopolistic intent, it probably 
would be declared unconstitutional in view of the earlier decisions, 
and that if so limited, probably it would add little if anything to the 
effectiveness of the restrictions already contained in the Act. 114 
Moreover, maintaining that loss leader practices have perfectly 
legitimate uses and that they necessitate quantity limits, he doubts 
that such a law would express a sound public policy. 111 

The burden placed on the plaintiff to prove the intent required 
by the Act is doubtless a heavy one. But whatever the justifications 
for this whole series of presumptions intending to lighten the burden 
of proving guilt, the condition of unlawful intent, spelled out in the 
Act, continues to be a substantial limitation on its application. And 
apparently, the Courts and the Attorney General's Office have felt 
certain in recent years that this limitation is necessary to prevent 
the Act from being a price fixing law, contrary to its declaration of 
policy. 

APPARENT LAW IN 1950— COAD'S ANALYSIS 

If we look to the apparent state of the Unfair Practices Act in 
Montana, we find even stronger evidence, if anything, that it has 
increasingly been limited by the ideal and the practice of the "free 
market," over the past ten years particularly. As late as 1950, Pro- 
fessor Francis Coad felt compelled to write with great feeling and 

been subjected to the severest kind of criticism over the past forty years. Its 
broad use provided for here ignores the great desirability, if not necessity, of 
limiting the remedy strictly to the evil attacked. 

""HALPER, 128-131. 

ul Ibid., 124. 

"-According to Halper, the Los Angeles ordinance, the principal one of several, 
was declared unconstitutional in 1932, which greatly slowed the movement, 
both for ordinances and for legislation prohibiting quantity limits on purchases 
of loss leaders. He states that at least a dozen communities near Los Angeles 
alone had passed these ordinances. HALPER, 129-130. 

"'Ibid., 137-139. 

iU Ibid., 137. 

lv: 'Loc. cit. 

38 



even indignation, 1 ir> because, in his opinion, Montana's constitutional 
prohibitions against all forms of monopolistic practices 117 had been 
so grossly violated by the Montana legislature, when it passed both 
the Fair Trade Act and the Unfair Practices Act. And, to that mo- 
ment, there was little evidence that any of the enforcing agencies 
showed any awareness of that fact. 

At that time, Coad thought there still was great danger that the 
Unfair Practices Act would be so construed and administered as to 
make it a price fixing law. To avoid this, he was particularly con- 
cerned with stressing three principal points: 1. That the "unlawful 
intent" requirement should not be eliminated by construction; 2. 
That the Commission should not abuse its power to make cost sur- 
veys; 3. That informal enforcement should not be abused. 

The first, the proof of unlawful intent to injure and destroy com- 
petitors required by the Act itself, must serve as an effective limita- 
tion on the scope of the Act. To this end, Coad stressed the fact 
that normal "injury" incident to ordinary price competition must 
never be allowed to satisfy that requirement. 1,s As still further as- 
surance that the intent requirement be effective, he suggested what 
would amount in effect, in some instances, to a presumption in favor 
of the defendant — limited, however, strictly by inferences reasonably 
drawn from the particular facts. 119 He pointed out that, to weigh the 
evidence realistically, the relative size of the competitors must be 
taken into account. In his words: 1 - 

The economic power of the offender should be an important consid- 
eration. For a large, competitively powerful merchant, or group of 
merchants, to complain that a small competitively insignificant com- 
petitor, who is cutting prices below the level they are trying to main- 
tain, to draw business, is trying to injure them is highly absurd. To 
claim that such merchant is trying to "destroy competition" is ludic- 
rous. To argue that a small bit of price competition can destroy com- 
petition would be pure fantasy, since competition is essentially price 
competition. 

Not only has Montana's Attorney General fully supported that 
position since Coad wrote, 1 - 1 but a California court also heartily 
agrees, in the following words, noting the relative disadvantage of 
the single store operator with the large chains: 1 - 2 

""Coad, Are Montana's Price Fixing Statutes Valid?, XI MONTANA LAW 
REVIEW 21 (1950). 

^CONSTITUTION OF MONTANA, Article XV, section 20. 
ns COAD, op. cit., supra, n. 116, at 39. 
rt9 Ibid., 37-40. 
} -"ld., 39-40. 

]2 '25 MONTANA ATTORNEY GENERAL'S OPINIONS 10 (Op. No. 8, 1953- 
54). 

'"Northern California Food Dealers, Inc. v. Farmers Market of Northern Cali- 
fornia, Inc., Superior Court, Sacramento County No. 99,499, July 2, 1956; 
HALPER 66, n. 1, 69. 

39 



. . . The owner of a small grocery, with perhaps one or two stores, 
is financially unable to purchase merchandise in such large amounts 
and in order to meet competition of the chain stores is required to sell 
standard brands at less than cost. ... 

This statement was made to justify liberalizing the statutory pro- 
vision permitting the defendant to sell "the same article or product" 
to meet another's legal prices so as to require only a similar article 
or product. 1 - 3 This permitted the defendant to sell standard brand 
products below cost, against Safeway's private brands. In further 
justification, the Court added that to deny the small store this privi- 
lege would be "to force the little man out of business and make the 
chain store bigger, tending to create a monopoly." 124 

Coad's second principal objection to the Act was that it permits 
the Commission, for all practical purposes, to utilize highly arbi- 
trary facts in determining cost, 1 - 5 establishing, in effect, fixed mini- 
mum prices (market floors) at a relatively high level, through the 
Commission's authority to make cost surveys. He went to consid- 
erable lengths to demonstrate 1 -" that legitimate accounting practices 
would allow the computing of cost without adding anything for 
operating costs on items added to a merchant's line which actually 
caused no cost increase. 

In the third place, Professor Coad was particularly concerned 
both with the informal enforcement of the Act engaged in by trade 
associations themselves and with the direct access those associations 
have to the Trade Commission in Montana because of the manner 
of its selection, 1 - 7 which at least increases the possibility of trade 
association influence on Commission policy. He believed that there 
were especially cogent reasons for objecting to such informal en- 
forcement in view of the composition of the Trade Commission 
itself. 1 - 8 He particularly objected to the survival of the old NIRA 
approach to market regulation by its own membership, exemplified 
in the fact that the Trade Commission is composed of experienced 
and active merchants chosen by the Governor from a nominating 
slate made up by the Montana Food Distributors Association. In his 
words: 

There are also some other serious constitutional objections . . .: 2. 
That there is an unconstitutional delegation of administrative and 
judicial authority to a commission which is in effect appointed by the 
merchants themselves and which can hardly be said to be a disinter- 
ested public commission which would represent the public without 
bias. . . . 139 



'-•HALPER, 68-69. 

'-'Ibid. 

'-"COAD, op. cit., supra, n. 116, 30-33. 

mi Ibid., 33-36. 

127 Ibid., 41, 49. 

r2fi Ibid., 31 n. 43. 

' 2i> Id., 41. 



40 



The state Act attempts to provide for both a considerable elimination 
of legitimate price competition, and a considerable group participation 
by merchants in fixing minimum prices through the guise of "cost sur- 
veys" and policing by such groups directly or through the state Trade 
Commission which is in effect appointed by them and consists of 
merchants. 130 

The merchants, through the Trade Commission, which is made up of 
merchants and controlled by them through the peculiar manner of 
appointment provided by statute, have been able to maintain such 
minimum prices by persuasion and coercion, individually by threats 
not to sell, and by Commission persuasion and coercion by threats of 
prosecution. This practice is treading extremely close to the ground 
of a combination and conspiracy in violation of the federal anti-trust 
laws. . . . 13X 

This objection raises an important further question as to how the 
Act has been and should be administered: To what extent has it 
been enforced informally by trade associations through various 
forms of trade pressures and/or "educational programs" cued to the 
association's interpretations of the Act? 

INFORMAL ENFORCEMENT 

Probably trade associations have been more or less active in en- 
forcing these Acts in most states which have them. This has cer- 
tainly been true in both California and Montana, where such asso- 
ciations are expressly authorized to sue, to enforce the Act and 
recover "damages," and to participate in other ways in carrying out 
its provisions, such as helping to establish cost surveys. Without 
doubt, such associations were relatively active in Montana prior 
to 1950 and their informal action substantially contributed to en- 
forcement. But Halper supports Coad's concern when he insists 
that: 132 

There is evidence that such grocery trade group enforcement activi- 
ties appear, in effect, if not intent, to move against all sales below 
cost. Grocer groups have found it difficult or undesirable to confine 
their group enforcement activities to sales below cost as defined in 
the provisions of the Unfair Practices Act. Such broadened enforce- 
ment activities, if encouraged, as would be the case if private group 
enforcement of the Unfair Practices Act was furthered in some way, 
would lead to some questionable consequences. The effects of wide- 
spread private enforcement efforts would be to discourage healthy 
competitive pricing practices, including sales made below cost for 
reasons of a non-"predatory" nature. 

Experience of the recent period indicates several situations in which 
group enforcement activities had the effect or intent of inhibiting all 
sales below cost, rather than only those ramifications of it as are 
prescribed by the Unfair Practices Act. 

More serious yet, in Montana in the earlier years of enforcement, 

130 Id., 43. 
im Id., 49. 
1 ^HALPER, 205. 

41 



ugly rumors were circulated to the effect that association member- 
ship was good insurance against unfair practice charges. Even if 
completely unfounded, these rumors were given plausibility by the 
intimate relationship between association members and Commission 
members. 133 And for several years added color was given these 
stories by the fact that the secretary of the Food Distributors Asso- 
ciation regularly served as secretary of the Trade Commission. 

Halper justifies questioning the desirability of such informal en- 
forcement for at least two additional reasons, one legal, the other 
economic. 134 In the first place, the series of convictions which the 
federal government secured against trade associations for just such 
practices in California in 1943 demonstrates how hard it is to keep 
such activity within the framework of lawful anti-trust conduct and, 
in Montana, within the lawful limits of our own constitutional anti- 
trust provisions. Secondly, experience demonstrates over and over 
that the inevitable and natural tendency of trade associations is to 
press continuously against sales below cost, in violation of the Act. 

Certainly, anyone reviewing the merits of this Act and its admin- 
istration may well be concerned with the question of its informal 
enforcement — all the more so since such procedure often is cited as 
being preferable to formal action. And without doubt, there are 
advantages to informal enforcement — provided it stays within the 
Act's proper jurisdiction. Even for the defendant, voluntary com- 
pliance is preferable to an adverse judgment because, among other 
reasons, on a third conviction the Attorney General has the duty to 
proceed against any corporate defendant for permanent dissolution. 
The possible criminal penalties are also serious in many ways. How- 
ever, under the existing marketing systems, a serious attempt should 
be made to answer the following important question: 

To the extent that the Act is informally enforced by "trade pressures" 
and "educational procedures," does or does not the principal impact 
of such action fall on the small, relatively defenseless merchant, who 
is not in a position to wage ruthless, killing competition in the first 
place, the very person whom the Act was designed to protect, leaving 
the economically powerful and predatory retailer largely untouched? 

ATTORNEY GENERAL'S 1953 OPINION 

With the Courts committed to one policy and the Trade Commis- 
sion and business representatives determined to administer this Act 
on a quite divergent, if not conflicting, interpretation, the issues 

^Impartial students of administration universally stress the vital importance 
of selecting an independent board, unrelated in any way with the group being 
regulated. PEAK, 150-151; HALPER, 212, insists there must be no personal 
connection between the regulators and the regulated, condemning Montana's 
Commission on that ground; Tannenbaum, Developments Affecting Cost 
Under the Unfair Practices Acts, 13 JOURNAL OF BUSINESS, 118, 128, 
(1940) quoting other authorities to the same effect. 

m HALPER, 205. 

42 



remained unresolved until well into the fifties. In 1953, however, the 
Attorney General's office issued an extremely important ruling 135 
confirming the principles expressed in the two leading Supreme 
Court cases providing the principal legal framework for administer- 
ing and construing the Act. Heavily relying in part on Coad's critical 
analysis of Montana's law on unfair practices, this opinion is much 
more persuasive than such opinions often are, both because it rests 
on a careful and reasoned analysis of those two cases and because 
it receives powerful support from the equally well-reasoned opin- 
ions, not only of the courts of California in these latter years, but 
of the Attorney General of that state as well, construing its Unfair 
Practices Act from which our own Act was derived. 

The opinion of our own Attorney General merits careful consid- 
eration. In 1953, the Montana Trade Commission asked the Attorney 
General to rule on the validity of trading stamps, under Montana's 
Unfair Practices Act. Specifically, its question was this: 186 

Does a grocery store selling at a price representing invoice cost plus 
the minimum markup established by a cost survey for the area violate 
the Act if it gives trading stamps, representing a cash discount of 
approximately 2 percent? 

The opinion laid down the following four principal propositions: 

1. A sale at invoice cost plus the "minimum markup" fixed by the 
Trade Commission, upon which a trading stamp is given, is not neces- 
sarily a sale below "cost" as that term is defined in the Unfair Prac- 
tices Act . . . whether or not such a sale is a sale below cost must be 
determined upon the facts of the individual case, taking into account 
the cost accounting system of the individual merchant. 337 

2. If a sale is found to be below cost, that fact alone does not consti- 
tute a violation of section 51-103, RCM 1947; it must also be proven 
that the sale was made with intent to injure and destroy competition, 
and the sale, in and of itself, does not constitute proof of such intent. 138 

3. The provisions of section 51-105, RCM 1947, do not establish the 
"cost" survey as an absolute standard by which all merchants must 
establish their prices. Any reasonable system of allocating costs may 
be followed in establishing prices by the merchant. Section 51-105, 
supra, merely permits the introduction into evidence of the cost sur- 
vey, for the use of the trier of fact in determining whether the mer- 
chant's method of allocating costs is reasonable. 13 " 

4. It is the duty of the Montana Trade Commission to determine upon 
the facts of individual cases, whether the giving of trading stamps 
constitutes a reduction in the selling price of an article; whether this 
reduction brings the sale below "cost" as that term is defined in the 
Unfair Practices Act; and whether such sale was made with the intent 
to injure and destroy competition. 14 " 



135 25 MONTANA ATTORNEY GENERAL'S OPINIONS 10-16 (Op. No. 8, 
1953). 
™Id., 10. 
137 IcL, 10, 16. 
"*Id. 
VM Id. 
iM Id. 

43 



Notably, in addition to confirming and justifying the other prin- 
ciples enunciated by our two leading Unfair Practices Act cases, 
this opinion particularly stresses the fact that it is the cost to the 
defendant which is controlling, not the cost computed by somebody 
else on the basis of a generalized formula, and that the defendant 
has a broad discretion in allocating costs on any reasonable, i.e., 
permissible, accounting basis so long as it does not impeach his 
good faith. The opinion quotes Justice Angstman from Ormesher 
as follows: 141 

. . . the legislature did not intend to prescribe that the cost must be 
absolutely exact, and that it must be based upon the precise method 
of accounting which any one merchant might adopt, but meant, by 
"cost" what businessmen generally mean, namely, the approximate 
cost arrived at by a reasonable rule. 

It continues: 142 

To fix a single figure and say that it shall represent the cost of every 
merchant in the area upon a particular item would result in arbitrarily 
fixing of the price of every commodity, without regard to the economic 
considerations which affect individual merchants. 

Considering the precise question in issue, the legality of trading 
stamps, it observes that there has been a conflict of rulings on 
whether trading stamps constitute a "gift," possibly coming under 
the ban against making gifts by merchants, or a "cash discount" 
subject to the statutory provisions regulating the use of cash dis- 
counts to compute "costs." 14 ' 5 The opinion points out, however, that 
since Montana's prohibition against using cash discounts to reduce 
costs refers to such discounts between manufacturer and wholesaler 
and retailer and not to those between the latter and the consumer, 144 
that section is not relevant to the question of the legality of trading 
stamps in Montana. 

The opinion also offers a very interesting policy rationale for the 
provision in section 51-103, prohibiting the deducting of "customary 
cash discounts" from the "invoice price" to compute "invoice costs." 
According to the opinion 145 (and it probably is correct) this provision 
is not a refusal by the legislature to recognize the discount as re- 
ducing the cost, but rather a "relief measure" to allow the merchant 
who buys on credit an opportunity to compete equally with the cash 
purchaser to avoid forcing the credit buyer to change his buying 
practices. Building on this rationale, the opinion concludes that giv- 
ing trading stamps may, in some cases, reduce an otherwise "above- 
cost" price to a "below-cost" price. It states that conclusion thus: 140 

li] Id., 14. 
U2 Id. 
lis Id., 12. 
lu Id. 
14S Id. 
lw Id. } 15. 

44 



This opinion does not mean, and should not be construed as meaning, 
that all discounts from the selling price of any commodity by the use 
of trading stamps are legal under the Unfair Practices Act. Even if 
the reduction in price to the consumer accomplished by the stamps is 
slight, it must be shown, by some reasonable method of keeping ac- 
counts, that the reduction does not reduce the selling price below the 
merchant's cost. This is the rule of the Ormesher case, and the law 
of this state. 

But even so, there still is no violation unless it is further shown 
that such selling was "done with the intent of injuring competitors 
and destroying competition." 147 In driving this point home, the At- 
torney General finds it necessary to reject the clearly contrary 
assumption inherent in the Commission's original question in the 
following: 148 

In your letter of request you also state that you believe that when 
articles are sold at the minimum figure established by the invoice 
price and the cost survey figure, and a trading stamp given with the 
sale, it is a sale below cost, and done with the intent of injuring com- 
petitors and destroying competition. This intent is one of the indis- 
pensable requirements of a violation of the Act. Unless it is present, 
a sale actually and admittedly below cost is not a violation of the Act. 

Then the opinion advances one of the most significant propositions 
found therein stated in substance as follows: 149 

Since the Ormesher and Sawyers cases make it abundantly clear that 
the Act is directed only toward "ruinous price cutting, to injure and 
destroy competitors," all factors bearing on the question of whether 
the particular merchant may be presumed to have attempted to engage 
in such monopolistic practices, on the one hand, or rather, in ordinary 
price competition for any one of the variety of perfectly legitimate 
purposes, on the other, should be considered. Hence, relative size of 
the competitive operators, the general character of the related adver- 
tising or promotional activities, whether such pricing is readily ex- 
plained on some of the "proper grounds" for its use, etc., are all very 
important evidence under the Act. 

RECENT COMMISSION ADMINISTRATION AND PRACTICE 

In spite of this opinion stressing the double requirements of prov- 
ing a sale below the defendant's actual cost, plus an affirmative 
showing of an intent to injure, over a year after it was rendered 
the Trade Commission issued a ruling 150 adhering to its original 
assumption that any merchant who gives a trading stamp with the 
purchase of any item sold at the minimum price, measured by the 
invoice price plus the percentage increase required by the Commis- 
sion's cost surveys, violates the Unfair Practices Act. What followed 
the distribution of this ruling, however, may be the most significant 

xt -7d. 

m Id., 16, citing and relying heavily on Coad, in 11 MONTANA LAW REVIEW 
21,39. 
i: '"Op. cit., supra, n. 89. 

45 



development in Montana, under its Act, to date. In the light of 
subsequent experience in attempting to "administer" and enforce 
this ruling, the Commission became convinced that the presumptions 
of guilt which its order relied on would not be sustained by Montana 
courts; that to enforce and make effective a prohibition against using 
trading stamps, it would have to refute evidence of actual costs of 
the particular defendants and to prove affirmatively the necessary 
intent to destroy competition, as established in the cases and the 
opinions discussed above. The writer has been informed that the 
Commission has decided that it is impossible to enforce effectively 
any limiting regulations on the use of trading stamps by merchants. 
Their current use by nearly the entire retail trade further attests to 
that fact. 

But this change in the Commission's administration is not the only 
one appearing in its practice in recent years. 151 The rumored irregu- 
larities suspected by Professor Coad, which may have existed at least 
as late as 1950, have been modified in several important respects 
over the past several years so as to remove even the appearance of 
possible maladministration. The Commission and its administrative 
officers are to be strongly commended for effecting these changes. 
The practice of combining the secretaryship of the Food Distributors 
Association with that of the State Board of Food Distributors (and 
thus with the Trade Commission) has long since been abandoned. 
And although for some years the person serving as legal counsel for 
the Trade Commission also served as its executive secretary, those 
positions likewise have been separated. And the counsel for the 
Trade Commission assures the writer that the trade associations in 
the state are not participating informally in enforcement procedures 
at present, and have not done so for some time. 

One of the more fundamental changes regulating the administra- 
tion of the Unfair Practices Act, resulting from a 1957 amendment, 
does not appear anywhere on the face of that amendment. It in- 
volves the method for financing the administration of the Act by 
the Trade Commission. The Act creating the Board of Food Distrib- 
utors and directing that Board to inspect and license food stores 
always has limited its operations and expenditures to funds derived 
from such licensing. 1 "' 2 It expressly prohibited the payment of any 
Board expenses from the state treasury. However, when that Board 
was made ex officio the Trade Commission, apparently it was as- 
sumed that this restriction on its expenditures did not extend to its 
operations as such Trade Commission. At any rate, the legislature 
continued to make substantial annual appropriations to the Montana 

i:,1 This information conies from personal correspondence with the Commission's 
counsel. 

ir '-RCM 1947, section 27-313, as enacted in LAWS OF MONTANA 1939, Ch. 49, 
section 13. 

46 



Trade Commission until 1957. In that year, however, the legislature 
amended RCM 1947, section 27-310, by increasing the annual food 
store license fee from two dollars annually to five dollars, 1 53 which 
provides a budget of about twenty-five thousand dollars annually. 
Reportedly this was done with an informal understanding between 
the legislative committees involved and the Board that the Board 
would thereafter carry on all of its varied official duties within the 
limits of this income. At the same time, the legislature discontinued 
the annual appropriations to the Trade Commission. So, a basic 
change in Trade Commission financing occurred without one word 
being said on the matter in the Code. 

Recently, problems and difficulties incident to the UPA's admin- 
istration took a bizarre twist — and somberly impressed the Com- 
mission on the hazards of enforcement. That agency charged certain 
travelling photographers with "below cost" violations. The potential 
defendants retaliated by suing the Commission's counsel for libel, 
asking two hundred thousand dollars damages. At the moment, i.e., 
July 1961, the case is being tried and the issues have not yet been 
resolved. 

This description of the developing law and practice under Mon- 
tana's Unfair Practices Act seems to justify the statement that the 
Act has been increasingly limited by the ideal and practice of the 
free market, particularly over the past ten years. It is significant 
that a parallel growth in California law has occurred in substantially 
the same period. 

MODERN CALIFORNIA LAW 

Court Decisions 

Until 1953, the grocery trade in California had relied heavily on 
the "loss leader" provision as a basis for proving "per se" violations, 
regardless of intent. 1 "' 4 However, in that year, the California Appeals 
Court upheld a trial court judgment in favor of the defendant, 
Dallas, who had been sued for damages by Ellis. 155 The plaintiff 
claimed that Dallas, in business in the same trade territory, had 
offered many "loss leaders" to prevent his entry into the grocery 
business, thus injuring him. This case not only found that the section 
of the Act prohibiting loss leaders implies the requirement of an 
intent to injure, but that the plaintiff had failed to prove such intent. 
This decision strongly reaffirmed the earlier conclusion that the 

1,:, LAWS OF MONTANA 1957, Ch. 93, section 1, amending RCM 1947, section 
27-310. 

j;u HALPER, 59-60, noting that, "Unlike the sales below cost prohibition, how- 
ever, the 'loss leader' provision (section 17,044) contains no express require- 
ment of intent to injure in proving a violation of the Act." 

JV 'Ellis v. Dallas, 113 Cal. App. 2d 234, 248, P 2d H3 (1952). 

47 



Act requires proof of such intent to injure in addition to below-cost 
practices. 

Almost immediately, trade associations succeeded in getting the 
Act amended by redefining "loss leaders." To the present, however, 
these changes seem to have been futile. The one case considering 
the effect of the amendment concludes that the rule of Ellis v. Dallas 
had not been changed at all; 156 and, even more important, the Act's 
prime enforcement agency in California, the Office of the Attorney 
General, concurred in the view that proof of unlawful intent is still 
necessary under the loss leader provision, even after amendment 157 
— Ellis v. Dallas was still law. 

Apparently, the current California law also agrees with Montana's 
on another important point. The leading Montana cases, the Attor- 
ney General, and Professor Coad all agree that a dealer should not 
be bound by operating costs computed by the Commission's cost 
accountants; that instead, various criteria for computing costs should 
be available to a merchant, and that he should be allowed to follow 
any reasonable system of allocating costs in establishing his legal 
prices. Although this position has not been extensively litigated in 
California, it also was approved by then Attorney General Brown 158 
and in trial courts in both California and Washington. In People v. 
J. M. Long, 15 '-* the San Francisco Superior Court appointed an ac- 
counting firm to check on the defendant's claim that his costs were 
departmentalized and that the disputed costs were much less than 
his overall costs. The Court accepted the accounting firm's findings, 
which agreed with the defendant's. 

The practical effect of these sound public policy limitations on 
the Act is to limit its operation to conduct which is strictly monopo- 
listic in its tendencies. As Professor Rodgers so convincingly ex- 
presses it, sales below cost have a desirable, legitimate, and even 
necessary function as a competitive technique, in a variety of situ- 



156 Northern California Food Dealers, Inc. v. Farmers Market of Northern Cali- 
fornia, Inc., Superior Court, Sacramento County No. 99,499, (1956), as cited 
in HALPER, 66, n. 1. 

ir,7 Edmund G. Brown, The New Amendments to the Unfair Practices Act, pp. 
1-11 (Address before the California Grocers Association, Sept. 1953. In the 
files in the Attorney General's Office), as cited by HALPER, 27, n. 3, and 
analyzed at 27-31. 

K '*Ibid., 3, 4. Brown states, "The measure of the only offense denounced by 
the statute is the defendant's own cost of doing business, whatever that may 
be." This statement was made to refute the claim made in trade journals that 
the "six percent prima facie cost" amendment really created a mandatory six 
percent markup. HALPER, 77, n. 2. 

'""People v. J. M. Long, San Francisco Superior Court, (1946). Court appointed 
accountant agreed that defendant's departmentalized costs on cigarettes were 
much lower than his overall "cost of doing business," and the Court accepted 
it as a defense. A similar Washington case is discussed in Burd, "Cost" Under 
the Unfair Practices Act, VII JOURNAL OF MARKETING, No. 2 (Oct. 1942), 
146-151. HALPER, 73, n. 2. 

48 



ations. He lists four common situations in which their use should 
be unregulated: 100 

(1) In new enterprises seeking to get started; (2) in concerns seeking 
to enter new industries; (3) in firms seeking to develop by-products; 
and (4) in firms seeking to reduce unit costs through an aggressive 
pricing policy. 

Rodger's list does not include loss leaders as such, but some com- 
petent authorities would support their use as an additional legiti- 
mate practice in a genuinely free market. 101 

If this analysis of the present operation of the Unfair Practices 
Act is correct, we may conclude that one of the important guides 
for limiting legislation set forth early in this paper — that legislation 
should be limited rigorously to the evil sought to be corrected, and 
only so long as that evil exists — seems to be complied with. For- 
mally, at least, it appears that the proper uses for cut-price compe- 
tition are preserved for the market, at the same time that "preda- 
tory" pricing practices are outlawed for merchants generally. 

Current Administrative Policy 

At about this same time, the chief administrative agency for the 
Act in California, the Attorney General's Office, further enlarged 
the area of agreement between the unfair practice laws of that state 
and of Montana by issuing a series of strongly expressed policy 
statements declaring that California's Act must be administered as 
a law against restraint of trade rather than as a price fixing law. 
Contrary to the policy expressed earlier by Mr. Howser, Attorney 
General Edmund G. Brown, who took office in 1951, insisted that 
the Act was one of California's anti-trust laws, thus underscoring 
the fact that his office would not and could not, under any circum- 
stances, construe the Act "as a minimum price or resale price main- 
tenance law" and stressing the "intent to injure" requirement. 102 
This new policy was the more significant in view of the fact that by 
1951 the legal rights and powers of that Office, under the Act, had 
been both clarified and strengthened. As Halper says, "A combina- 
tion of legislative and judicial events had granted the Attorney 
General a potent weapon with which to proceed." 10 " 



,fl "R. Rogers, 7s Fair Trade a Trojan Horse?, LX DUN'S REVIEW (Aug. 1952), 
pp. 27-28 ff. Cited in HALPER, 206, n. 1. 
""HALPER, 125. 

'"'Edmund G. Brown, The New Amendments to the Unjair Practices Act. (Ad- 
dress before the California Grocers Association, Coronado, California, Sep- 
tember 23, 1953), pp. 1-11, at p. 2. Brown also gave a speech to the California 
Grocers Association in 1951, suggesting the beginnings of his UPA policy, 
developed over the next two years. HALPER, 24. His 1953 formulations are 
cited here, because they fully articulate that policy. 
J03 HALPER, 23. There had been much uncertainty on whether public officials 

49 



As a second condition to enforcement by his Office, Brown also 
required evidence that the practices objected to have a tendency 
to become state-wide in effect. 104 Moreover, he urged that private 
agencies and local enforcement officers exhaust their authority to 
enforce the Act before resorting to his Office. 105 

Thus we see that the developing expressions as to the proper scope 
of the Unfair Practices Act, both by the courts and the Attorney 
General of California formulating the expressed public policy of 
that state in the administration of this Act, closely parallel those in 
Montana. There is one significant difference between the two states, 
however. The rulings of the Attorney General in California are 
much more than mere administrative judgments as to how the courts 
will interpret the Act. They are a declaration of administrative 1 
policy by the Act's chief administrative agency, and therefore they 
delimit the scope of its administration in large measure. These 
rulings have the same impact on the application of the Act in Cali- 
fornia that policy statements by the Trade Commission delimiting 
the Act's administration would have in Montana. 

EVALUATION 

The developing construction and administration of the Unfair 
Practices Act as exemplified in these two dissimilar states, California 
with its highly developed industrial and economic order and Mon- 
tana with its relatively underdeveloped extractive economy, strongly 
support the conclusion that, at least for the time being and in the 
near future, the free market, both formally as an ideal and in prac- 
tice, continues to have marked vitality in business and marketing 
generally. It has formed the basis for the formulation of policy, both 
in the courts and in the most influential administrative agencies. 
This fact is even more arresting when we consider that determined 
attempts have been made, both in the original Act and through 
amendments in California, to make it function as a price-regulating 
law. 



are "persons" under the UPA, section 17,070, empowering any person to enjoin 
violations under the Act. There also was doubt on whether the Attorney 
General's power to enjoin "unfair competition" extended to the UPA. Finally, 
a State Supreme Court decision ruled that public officials were covered by 
section 17,070, contrary to lower Court decisions. Then legislation denied the 
power to district attorneys, but left the Attorney General's power intact, 
with further reinforcement by an Act defining UPA violations as unfair com- 
petition. With the trade associations hesitant to seek injunctions because of 
earlier antitrust convictions (see HALPER, 20, 147), the Attorney General's 
established power loomed large. See HALPER, 17-23, 147, 152, discussing 
these developments. (These ambiguities have not troubled enforcement in 
Montana, because of the express authority given our Trade Commission to 
enforce the Act with all appropriate remedies.) 
16, HALPER, 29-30. 
i nbid., 29. 

50 



THE IDEAL COMMISSION 

Implicit in many of the commentaries on unfair practices acts, but 
particularly in Coad's critique of Montana's law, is the question of 
what should be the composition and jurisdiction of the ideal admin- 
istrative agency for such regulatory codes. This fundamental prob- 
lem can be answered only in the light of the long-range public 
policies dominating that legislation. 

In those areas, to the extent that our economic system remains 
committed to the free market, we are compelled to ask a further 
series of basic questions: 

1. Assuming we remain committed to the free market, is its value 
really limited by predatory practices which must be prohibited; 

2. If so, is this statute, in its present form, the best way to deal with 
the general problem of eliminating predatory practices without dam- 
age to healthy, desirable forms of competitive practices; 

3. How can the evils which this Act seeks to eliminate be most ef- 
fectively dealt with without a regular recurrent overreaching of its 
prohibitions — a persistent pressure to outlaw or exorcise much more 
than should be prohibited in a free market; 

4. Is it not too much to expect an independent Commission, the mem- 
bership of which comes from the trade — created for the sole purpose 
of enforcing the restrictions of the Act and of punishing its violators — 
to maintain that perspective so essential to overall, wise administra- 
tion — measured by sound "anti-trust" policy; 

5. Should not any such Commission be directed to act affirmatively 
for "fair practices," as well as negatively, to prohibit or punish? 

On further examination of this problem, those who oppose any 
kind of governmental participation in economic activities as imper- 
missible meddling or unlawful encroachment on private enterprise 
might be expected to conclude that the market should be given back 
to the businessman, so to speak. However, it is precisely those most 
likely to oppose "intervention" generally who may most strongly 
champion the prohibition of all below-cost practices. In any case, 
presumably, we cannot ignore predatory pricing practices. If this be 
granted, some kind of regulation seems called for, and regulation 
suggests an administrative agency. 166 



" ! "A short answer to the suggestions which has been made that a study of this 
kind "should take into full account the current economic trend," rather than 
being based on economic assumptions of the past, is that, judicially, adminis- 
tratively, and legislatively, those traditional assumptions have reasserted 
themselves in very considerable measure over the past fifteen years — graph- 
ically illustrated in the administration of the UPA in both Montana and 
California during that period. This is the current trend in political and legal 
thinking. Whether it is a superficial and short term development and whether 
it flies in the face of economic reality is yet to be resolved. But one of the 
most recent exhaustive studies of the importance of small business in the 
whole of our economy, and of its contribution to the health and well-being 
of that economy, supports the conclusion that small business, with a maximum 
of free entry in free markets with free competition, including the fullest 
practicable opportunity for the expression and growth of personal initiative 
and individual judgment, continues to be vital to the economic well-being and 
security of this country. See 15 USCA, section 631, as amended; Federal 
Reserve System, Report to the Committees on Banking and Currency and the 
Select Committees on Small Business, United States Congress (April 1958). 

51 



Though not dogmatically plumping for administration by Com- 
mission, Halper concludes that it probably will be approved even- 
tually in California. 107 His incisive analysis of the requirements of a 
dynamically competitive market is notable for its clarity and its 
reasonableness. 168 He calls for radical substantive modifications, 
both of the traditional Commission and of the law it would admin- 
ister. 109 To be consistent with the sound public policy, anti-trust 
centered, which he finds that California has developed over the past 
ten years, he believes the ideal Commission must have two broad 
purposes: 170 

1. Actively to prevent unfair methods of competition and deceptive 
practices in business, and 

2. Positively to promote fair methods of healthy, aggressive competi- 
tion, particularly price competition. 

The present Unfair Practices Act considers only the negative side 
of a dual problem. To maintain its perspective, and to achieve anti- 
trust policy, it is "equally important for the Commission to prescribe 
positive rules for the promotion of healthy competition, as well." 171 

Halper believes that, to implement these purposes, a study com- 
mittee should be officially appointed to review the entire anti-trust 
field. 171 ' This committee should be similar to the one appointed by 
the United States Attorney General in 1953, which made a very 
worthwhile report. 173 At the outset, he rejects any suggestion that 
members of the Trade Commission should be selected from any 
representative group, as is done at present in Montana. 174 The Com- 
mission must be made up of highly trained men with legal and 
economic qualifications, plus consumer and industrial representa- 
tives; the public interest cannot be served otherwise. 175 A most im- 
portant further condition is that the Commission be enabled to pur- 
sue its purposes through a broad, flexible statute, potentially cover- 
ing all competitive business practices, perhaps with an implementing 
clause framed on the order of the Federal Trade Commission Act, 
thus: 170 "Unfair methods of competition in commerce are hereby de- 
clared unlawful." 



],,7 HALPER, 207 ff. 
" iS Itod., 207-219. 
169 Id., 210-216. 
K, Td., 209, 213. 
' 7, Id., 214. 
17 'Id., 210. 

^ATTORNEY GENERAL'S NATIONAL COMMISSION ON ANTITRUST 
REPORT (1955). 

174 HALPER, 212. Halper severely criticizes Montana's method for selecting 
its Trade Commission membership. 
17r Id., 211. 

176 Id., 213, 216. Some might demur to the suggestion that the Federal Trade 
Commission be taken as a model. 

52 



The Commission might well develop other positive programs, 
such as holding "industry-wide conferences and public hearings for 
the various trade groups" to draw up and publicize rules of "fair 
competition," agreed to by the respective trades (advisory). 177 In the 
past, a trade association often has been unable "to get a thorough 
hearing of its trade practice problems before any public body," says 
Halper. 178 

Even though such views should have an inhospitable reception in 
Montana for the present, they demonstrate the possible value of 
perspectives other than the grossly narrowing one expressed in the 
present Unfair Practices Act. At the least, an intelligent review of 
what the public policy for Montana should be in this area, bearing 
in mind our explicit constitutional limitations thereon, seems to be 
in order. That policy should be framed in terms of the common 
interests of all groups concerned. If it is found necessary to continue 
legislation prohibiting predatory competition, Halper's recommend- 
ation that the administrative agency should be composed of experts 
with maximum objectivity, and that it should have a broad compe- 
tence to deal dynamically with all phases of competition should be 
given the most serious consideration — educating for healthy, as well 
as regulating unhealthy, competition. To this suggestion, however, 
may be added the cautionary one that in view of the serious limita- 
tions of all forms of government by Commission operating at their 
very best, any committee studying this problem should very care- 
fully consider whether Montana really needs any kind of govern- 
mental regulation of competition at this time. llu 

1963 ADDENDUM 

In the two short years since the above was written, we find a 
striking modification in the administration of the Unfair Practices 
Act by the State Board of Food Distributors, acting ex ojficio as the 
Montana Trade Commission. Very possibly it has stiffened its en- 
forcement posture, reverting to its very early policy of aggressive 
enforcement of the Act. At any rate, within the last six months, the 
Trade Commission has greatly stepped up its enforcement proced- 
ures. 180 

""Id., 216. 

" :k Id., 217. 

17 "Recent revelations by and publicity given to the Landis Report to the Presi- 
dent on defects and short-comings of "government by commission" generally, 
as exemplified by federal commissions as a class, with its recommendations 
for sweeping changes in their organizations, give point to this observation. 

"""Certain changes in the Montana Trade Commission's executive personnel may 
or may not have significance in judging whether its enforcement policy has 
undergone a significant change over the past two years. At any rate, the 
gentleman serving as their legal counsel and secretary for about ten years, 
from 1953, was dismissed on November 1, 1962, very possibly because of pres- 

53 



With the opening of a number of new grocery stores in the state by 
out of state chains in the last two years, price competition has become 
much more severe, allegedly leading to considerable below-cost sell- 
ing. For some time the Commission tried to secure "compliance" by 
mutual agreement. When these arrangements proved ineffective, 
the Montana Food Distributors Association noted the increased fre- 
quency of alleged price violations in its annual meeting in the sum- 
mer of 1963, and urged that steps be taken to enforce the Act. 

That needing the most urgent attention appeared to involve the 
pricing of turkeys. Early in the fall the Commission mailed notices 
to all stores with meat departments, giving to November 1, 1963, to 
correct such alleged price "violations," with a promise of prosecution 
for all violations after that date. Complaints have now been issued 
to eight leading store systems in the state, including a number of 
Montana based chains, charging them with continuing violations 
after November l. 181 

There is evidence that this renewed enforcement activity is for 
the purpose of determining, once and for all, whether it is possible 
to effectively regulate selling asserted to be below-cost under the 
existing Act. If necessary, the Commission appears to be prepared 
to go to the Supreme Court to test conclusively the extent of its 
power to regulate minimum prices, presumably on the decision that 
if this Act does not have the kind of teeth the Board wants, the 
sooner it determines that fact, the better. And, it may get that test. 
At least one store chain is resisting those attempts to regulate it by 
maintaining that strict regulation of the type often attempted under 
the typical Unfair Practices Act is in conflict with the Sherman Act, 
which might subject at least any private organization, and possibly 
even a state agency, to prosecution under that Act. 

This much is true in support of that store's position. Attempts to 
set minimum prices by formula are not permitted by the Act and 
are illegal. All relevant Montana, California, and federal authority, 
both early and recent, supports that conclusion. For example, late in 
1959, criminal antitrust actions 182 were filed in Southern California 
against thirteen corporations engaged in the retail sale of groceries 
and a trade association, charging them with having entered into an 
"agreement not to sell or advertise groceries at prices less than the 

sure from members of the Montana Food Distributors Association, rather than 
from the Commission as such. About a year prior to his resignation, the Com- 
mission had hired a "fact finder," or "investigator," who also became the 
Commission's Secretary. On November 1, 1962, another attorney was retained 
as legal counsel. The investigator retains the position of Secretary, with a 
clerk-stenographer hired to keep the actual records. The renewed enforce- 
ment activity has developed within the past year. 

lsl This summary of events from mid-summer 1962 comes from a telephone 
interview with the Commission's counsel, December 6, 1963. 
18 -U. S. v. San Diego Grocers Association, Inc. et ah, 177 F. Supp. 352 (Dist. Ct. 
S. D. Cal., 1959). 

54 



invoice or replacement cost . . . plus 6%." Reportedly, the Court 
recently found the defendants guilty, declaring that, "Although 
ostensibly said agreement was to abide by the Unfair Practices Act, 
the agreement had for its purpose and it was the intent of the 
Defendants to establish the minimum prices as described . . . De- 
fendants . . . entered into an unlawful combination and conspiracy 
to establish, maintain, and stabilize non-competitive prices for the 
sale of groceries . . . in . . . violation of . . . the Sherman Act." 18 " 

All the controlling Montana and California cases rule that "mini- 
mum prices by formula" are illegal. But, even if state enforcement 
agencies succeeded in getting the State Supreme Court to reverse 
that rule, there would still be danger of Sherman Act violation 
charges, and more importantly yet for Montana business, the statute 
so construed would be subject to constitutional attack under our 
constitutional provision outlawing trade restraints and price fixing 
of all kinds. 184 

The smallest lesson learned from a series of recent cases is that 
the principle of outlawing all forms of trade restraint, under the 
Sherman Act, continues to have the fullest vitality, as in Asheville 
Tobacco Board of Trade, Inc. v. FTC, a 1961 case. 185 There, the Court 
of Appeals upheld the Federal Trade Commission's cease and desist 
order, based on a finding that certain regulations adopted by peti- 
tioner, Asheville Tobacco Board of Trade, Inc., unreasonably and 
unduly restrained trade in the purchase and sale of tobacco on the 
Asheville market, constituting an illegal restraint of trade, an unfair 
practice, and an unfair method of competition, under the Federal 
Trade Commission Act. Further, it declared that it was for the 
federal court to determine the legal character of the Board. This 
followed and directly conflicted with a state decision characterizing 
the Board as an "administrative commission" and ruling that all of 
its regulations were legal. 18 " And in two 1962 federal decisions, the 
District Court in Utah 187 and the Circuit Court in California 1 8S up- 
held government charges that, in distributing price schedules for 
prescription drugs to all its members throughout the state for the 
purpose of maintaining "uniform" prices based on wholesale costs, 

L8s This information was received in personal correspondence. The opinion is 

not available to the writer. 

^CONSTITUTION OF MONTANA, Article XV, section 20. Concededly, such 

charge might be resisted by interpreting Article XV, section 20, as applying 

only to private price fixing, but at least, the present Commission is suspect 

thereunder. 

1S Asheville Tobacco Board of Trade, a Corp., v. FTC, 294 F. 2d 619 (4th Circ. 

1961). 

18,i Day v. Asheville Tobacco Board of Trade, 242 N. C. 136, 87 S. E. 2d 18 (1955). 
: * 7 U. S. v. Utah Pharmaceutical Association, 201 F. Supp. 29 (1962); aff'd., per 

curiam, —PS—, 9 L ed 2d 96 (1962). 

lss Northern California Pharmaceutical Association, a Corp., et al., v. U. S. 879 

(1962), pet. for cert., den'd. 9 L ed 2d 99 (1962). 

55 



the defendant pharmaceutical associations were engaged in a con- 
spiracy to fix prices in unreasonable restraint of interstate com- 
merce, violating the Sherman Act. The Circuit Court, especially, 
dealt at length with the defendant's contention that, because its 
members were extensively regulated by the state, which recognized 
a special professional status in them, they were not subject to the 
rules regulating "competition" in business generally. It rejected the 
contention out of hand, with particular respect to goods sold by 
drugstores. 189 The District Court in Utah granted an injunction; 190 
the California case was a criminal action, in which the Association, 
its officer, its members knowingly participating, and participating 
county associations, were convicted of a Sherman Act violation. 191 

It is quite important for the trade associations in Montana to have 
in mind the cases just discussed, which, with earlier cases, provide 
abundant authority for the proposition that any attempt by trade 
associations to enforce the Unfair Practices Act, either formally or 
informally, as authorizing the establishing of a minimum price by 
formula, will be a violation of the Sherman Anti-Trust Act, and 
certainly does violence to all the leading decisions in both Montana 
and California, interpreting the Unfair Practices Act. 

Presumably, all current enforcement procedures, formal and infor- 
mal, are being carried out by the Trade Commission. But the posi- 
tion of the Montana Trade Commission itself, as enforcement agent, 
is not strengthened by the fact that its members have to be taken 
from the class of persons being regulated and have to continue to 
engage actively in the grocery business. 192 Hence, it is well for the 
Commission itself to be circumspect in enforcing the Act so as not 
to be subject to the charge that it too is engaging in anti-trust prac- 
tices. Not only might attempts to set minimum prices by formula 
subject it to a charge of violating the Sherman Act, it might be sub- 
ject also to attack under our own constitutional anti-trust provi- 
sion. 198 Moreover, the character of its membership may raise the 
question of whether the power to regulate has been unconstitution- 
ally delegated. 

We have been discussing the legal hazards present in any attempt 
to establish an administrative practice of setting minimum prices 
by formula, either with the aid of the courts, by private pressures, 



lfi, Id., at 383. 
m 'Supra, n. 187, at 36. 
' m Supra, n. 188, at 381, and 392. 

19J RCM 1947, section 70-201, declaring that the Montana State Board of Food 
Distributors shall serve ex officio as Montana Trade Commission; and RCM 
1947, sections 27-302 through 27-304, providing that such Board shall be com- 
posed of three food distributors with at least five years' experience, selected 
by the Governor from fifteen nominees submitted by the Montana State Food 
Distributors Association. 
™ 3 Supra, n. 184 and related text. 

56 



or by mutual agreement. It also is important to judge the desir- 
ability of such regulation in the light of a basic proposition which 
we chose for a guide at the outset of this study: Any remedy chosen 
must hold a genuine prospect of correcting a real evil and must not 
have any substantial adverse effect on beneficial market practices 
and conditions, i.e., it must not outlaw desirable practices. Predatory 
pricing competition is the only kind that can be called "evil." Yet, 
in the first place, it is practically non-existent as a monopoly se- 
curing device in the retail trade, because a competitor can profit 
from "predatory competition" only in those businesses where it is 
very difficult and very expensive to start a business or to re-enter, 
once you are out — requiring large capital investments, such as the 
oil refining business. The successful competitor cannot maintain 
a monopoly position in retail selling for any time so he cannot afford 
to pay the price necessary to gain it. Secondly, the principle impact 
of minimum price fixing by formula is in its destruction of healthy 
price competition of many kinds, rather than its elimination of any 
evil — the remedy is worse than the evil — it violates the second half 
of the above basic guide. 194 

Probably the thousands of businessmen represented by the many 
organizations frankly exerting their utmost efforts to repudiate in 
fact our most vital heritage in the business world, i.e., freedom of 
competition generally, but particularly price competition, have given 
little thought to what is implied in the restrictions from such statutes 
as unfair practices and fair trade on our economic society generally. 
If these regulatory devices were ever justified, it was for another 
time and another place than the present. So it is urgent that we do 
much rethinking, both on the character and the magnitude of the 
problems involved and on what appear to be real solutions therefor. 
Such rethinking raises serious questions as to whether representa- 
tives of the small merchant are not holding on to outworn cliches 
as to what are the major causes of their difficulties, along with out- 
moded ideas as to what are adequate solutions. 

Predatory price cutting, having as its object the taking over of 
a market after ruining all competitors in that market, is condemned 
everywhere, but particularly by anti-trust doctrine generally. Be- 
yond that, restrictions on price competition cannot be justified, 
stultifying the most dynamic element in the competitive market. 

Do not the primary difficulties of the small merchant today flow 



'•"Earlier, in Chapter I above, at page 3, we stated this basic guide, thus: "this 
view demand (s) a careful limiting of the remedy to the evil treated, using no 
remedy that does not give true relief, and insisting on applying any given 
cure only so long as needed." And again, in Chapter II, "(we approve of) 
legislation which attempts to provide a specific remedy for a particular evil 
in our economic system, without allowing that remedy to impinge on other 
areas not affected by the evil, and without approving remedies for alleged 
evils which in fact do not exist." 

57 



from developments in the marketing and distribution of goods of 
all kinds, having nothing to do with price competition? The great 
growth both in population and in the gross national product has 
encouraged equally great growth both in number and size of whole- 
sale-retail outlets. When this is combined with the marked changes 
in marketing practices and habits, induced by such developments 
as the massive suburban shopping centers favoring, if not requiring, 
large operating units, the competition which these changes offer for 
the corner drug store and neighborhood grocery is of an entirely 
different order from that of simple price cutting. The advantages 
large chains have are inherent in their abilities both to buy and to 
sell in large volume, with the most efficient management practices 
possible. They do not have to sell below their actual costs — if they 
are allowed the benefit of such costs — to put the small unit at a 
serious disadvantage. So, realistically considered, price competition 
by these large units will have little effect on the small units; the 
share of the market divided between the large distributors as a group 
and the small units will be determined largely on quite other grounds 
than that of price — grounds such as locality convenience. And the 
price competition waged among the various chains is directed at 
each other and is rarely predatory in character. 

In view of this resurgence in the activities and the pressures from 
various groups in the business world, seeking to put new teeth in 
both the Unfair Practices Act at the state level, and the fair trade 
principle at the national level, the suggestion made at the close of 
the original study, calling for a new type of Trade Commission, 
takes on a new and critical significance. Such Commission could 
study every means possible for maintaining a healthy, vital and via- 
ble competitive environment and would carry on educational pro- 
grams seeking to assist particularly the small business man. This 
Commission, composed of highly qualified representatives from 
every interested group in our society, might well be directed to 
study continuously every practice, procedure, or organizational de- 
vice holding promise for placing the small businessman in a more 
favorable position in relation to his more powerful competitors. This 
would be an innovation which all competitors, as well as all others, 
should approve. 195 



'"Unfortunately, many of those people most vigorously campaigning for regu- 
lations stultifying the "free market," thus repudiating the principle of free 
competition, would be among the first to charge this proposal as another 
example of "creeping socialism." This is one of the tragic ironies of our 
contemporary economic-political society — that almost any proposal for a co- 
operative endeavor of any kind is so likely to be stigmatized as being "social- 
istic," even though it be to preserve our basic economic freedoms. 

58 



Chapter V 
Fair Trade Acts 

INTRODUCTION 

Although legal barriers to competition are generally considered 
"bad" for the free market, the supporters of some of the common 
forms of regulation will insist, as we have seen, that they are "good" 
for a free market — or at least that they are a necessary evil, to 
minimize still more serious evils. 

If we accept the arguments of the more ardent supporters of "fair 
trade acts," next to be considered, they will have to be placed in 
this latter class. In a leading Review's symposium issue on small 
business, Albert Carretta, former Federal Trade Commission mem- 
ber, declares: "If the retailers were asked to name their most press- 
ing business problem today, their general answer would be 'discount 
houses.' ' ?1 In his view, these houses create a major economic evil, 
and his solution is the more effective enforcement of the fair trade 
laws. To this end, he urges that the Federal Trade Commission and 
other government agencies do all in their power to assist. 2 Else- 
where, however, he grants that there is a "current controversy over 
the economic wisdom of fair trade statutes." 8 Later, we shall con- 
sider this controversy further. But whatever our conclusions on 
the economic effects of such legislation, its legal position in Montana 
raises particularly complex questions. 

First, how does a Fair Trade Act serve as a remedy for promis- 
cuous monopolistic price cutting, for which Carretta champions it? 
Contrasting the legal rationale behind this Act with that supporting 
the other Acts studied here may help us understand it. 

The avowed purpose of the Unfair Practices Act, as we have seen, 
is "to foster and encourage (fair and honest) competition." In ex- 
treme contrast, the Acts regulating barbers and barber shops and 
the Milk Control Act frankly authorize and approve "administered 
prices," i.e., price fixing, and that by an independent Board or Com- 
mission. To support the legislative power asserted in these two Acts, 
it is necessary to rely on the special police powers of the state, 

J Carretta, Some Competitive Practices With Which Small Business Must Con- 
tend, 24 LAW AND CONTEMPORARY PROBLEMS (Small Business Sym- 
posium) 169 (1959). 
2 Ibid., 175-180. 
'Id., 171. 

59 



allegedly to protect the public health and welfare. Although justi- 
fied often as a means for preserving fair competition, similar to 
the Unfair Practices Act, the Fair Trade Act, 4 now to be considered, 
must be classed with these last two Acts in its frank approval of 
price fixing. This Act, however, is composed of two quite distinct 
"main" provisions which, although the second formally supplements 
the first and purports to reinforce it, may require very divergent 
rationales. A brief summary of the Act will help to make clear the 
relationship of these two principal provisions. 

MONTANA'S FAIR TRADE ACT 

This Act states, in substance, the following seven propositions: 

1. It authorizes the "fair trade contract," as described below, between 
buyer and seller, providing for a minimum resale price which, but for 
the Act, would violate anti-trust law generally;"' 

2. It extends this minimum resale price condition in any such agree- 
ment to all non-signers with knowledge — to the market community 
generally; 6 

3. It prohibits any practice amounting to an evasion of the resale price 
agreed on, such as giving any article of value, including coupons, with 
fair traded articles; or the combining of such article with any other 
article for sale, to permit a lower net price; 7 

4. It limits such agreements strictly to trade-marked or branded arti- 
cles, in "free and open competition with commodities of the same 
general class;" 8 

5. Its authority also is strictly limited to the owner of such trade-mark 
or brand, or to his distributor, "specifically authorized by such owner 
to establish such price;" 1 ' 

6. It enumerates several types of transactions exempted from any such 
resale price agreement, as follows: a. Close-out sale, provided the 
vendor gives his seller a chance to buy back at invoice price; b. Goods 
from which the trade-mark or brand is wholly removed; c. Altered, or 
second-hand or damaged goods, with public notice thereof; 10 

7. Although section 85-202 grants broad authority to "fair trade," 
section 85-207 prohibits horizontal agreements of all kinds, thus ex- 
cluding agreements among producers, or distributors, or wholesalers, 
or retailers. 11 

Conspicuous by its absence is any general provision for the en- 
forcement of this Act, though the "non-signer" clause is incorpo- 
rated into the Unfair Practices Act, and so, subject to enforcement 
by the Trade Commission, as well as other interested groups. It is 
assumed that the remedies generally available for breach of con- 
tract will apply to this contract containing a "resale price mainte- 
nance" clause. Provisions 1 and 2, as limited by 4, are the heart of 
the Act, and are the two with which we are especially concerned. 



4 RCM 1947, sections 85-201 through 85-208. 

T Ibid., section 85-202. 

"Id., section 85-206. 

"Id., section 85-203. 

h Id., section 85-202. 

"Id., section 85-204. 

,n Id., section 85-205. Emphasis added. 

"Id., section 85-207. 



60 



The first, the formally controlling provision, authorizes and legal- 
izes a contractual agreement between seller and buyer 12 providing 
for what is technically described as "resale price maintenance." By 
it, a manufacturer or producer of trade-marked products, or his duly 
authorized agent, is permitted to sell his product subject to a con- 
tract which seriously restricts the ordinary right of the buyer to 
set the resale price at whatever level he desires. 1 " Some such Acts 
permit the stipulating of a set price; 14 others grant power to the 
producer only to set a minimum price. 1 "' Montana's Act, which calls 
it a "stipulated" minimum, falls into the latter class. 10 The second 
principal provision in the Act imposes on other non-signer merchants 
a similar duty to conform to the fair-traded price, i.e., the price set 
by the producer. Legislation generally limits the duty of the market 
community to sell at the fair-traded price to those with knowledge 
of such price. 17 Montana's Act so provides. 18 This section is repeated 
in our Unfair Practices Act, which states that to sell below the fair- 
traded price constitutes unfair competition. 1 " 

LEGAL RATIONALE 

First Provision 

The rationale for approving the first provision is fundamentally 
different from that for the two price fixing acts to be considered 
later. Here, to uphold its constitutionality, no "police power" pre- 
rogative nor asserted state interest in the general welfare is even 
claimed. Instead, Fair-Trade Acts originally were sustained simply 

12 The Enforcement of Resale Price Maintenance (Notes and Comments), 69 
YALE LAW JOURNAL, 168, n. 1 (1959-60). 
ri Ibid. 

u Id., 170-171. Describing a proposed federal bill, the writer says, "The bill 
would create a right of action in federal court, irrespective of diversity of 
citizenship, to enforce adherence to the manufacturer's stipulated or minimum 
retail price." And, at n. 14: "The bill would allow a manufacturer to fix 
either an exact price or a minimum price." Old Dearborn Distributing Co. 
v. Seagram Distillers Corp., 299 U. S. 183, 185 (1936), the leading United 
States Supereme Court decision upholding the validity of state Fair Trade 
Acts, involved the construction of the Illinois Act which permits a "fixed" 
price. 

Vj Loc. cit., supra, n. 12. 
16 RCM 1947, section 85-202 (a) (b) (c). 

" Note: The Operation of F air-Trade Programs, 69 HARVARD LAW REVIEW 
316-351 n. 44 (1955), states "all statutes require that the price be cut 'will- 
fully and knowingly,' " concluding that, therefore, a mistake cannot be the 
basis for an action. 

lh RCM 1947, section 85-206. The section says, "Willfully and knowingly adver- 
tising, ... or selling ... at less than the stipulated price ... is unfair 
competition and is actionable. . . ." Though Montana has no case considering 
the point, California apparently interprets this language as calling for knowl- 
edge that the article is fair traded. Downs v. Benatar's Cut Rate Drug Stores, 
75 Cal. App. 2d 61, 170 P. 2d 88 (1946). 
1!, RCM 1947, section 51-101. 

61 



to give substance to the property right or at least goodwill, which 
a trade-mark is supposed to represent. 20 The simple market practice 
here regulated is the sale by retailers of trade-marked,- 1 nationally 
advertised goods at prices substantially less than the manufacturer 
would like them to command in the retail market. The statute 
allows the trade-mark owner to prohibit such "depressed" selling 
which, without this statute, would be in illegal restraint of trade. 
Thus the source of the price fixing is the contract, and the interest 
it protects is a purely private proprietary one. The extent to which 
the purpose of the Act formally is to protect property rights in the 
trade-mark is shown by the fact that one of the types of transactions 
expressly excluded from the operation of such agreement is where 
the trade-mark is removed or wholly obliterated from the com- 
modity and is not used to help sell the article.- 2 As early as 1936, 
the leading United States Supreme Court decision 2 ' 5 upholding Illi- 
nois' Fair Trade Act noted and relied on this fact in its rationale. 

Of course, it often is asserted, and sometimes may be so recited 
in Fair Trade Acts themselves, that the cut-price seller is trading 
on another's rights — that, in selling in this manner, he is taking 
advantage of the prestige created by the manufacturer's advertising 
and trade-mark — and that continued price cutting will destroy the 
trade-mark's special value which its owner has built up for it. Yet 
in a recent case before the Montana State Supreme Court, counsel 
arguing in support of the constitutionality of Montana's Fair Trade 
Act insisted that without such contractual restrictions, "If one 
chain of stores came into Montana and sold below the minimum 
price, it would put the economic system in chaos and throw the 
independent dealers out of business." 24 This harks back to Carretta's 
justification for such legislation on behalf of small businesses. 
According to this argument, the Act prohibits a special type of "un- 
fair competition." 21 Of course, it is based on certain assumptions as 
to the "cause and effect" of advertising and of the impact of trade- 
marks on buying habits, which may strike some as being at least 
debatable, but we shall postpone consideration of these assumptions 
for the time being. 



-"In the Montana Code, and generally, this Act is codified under Title 85 — 
Trade-Marks. 

-'To the present, the proposed federal legislation has not limited the fair trade 
privilege to trade-marked goods, which is practically an admission that the 
legislative purpose is broader than mere "good will" protection. 
~RCM 1947, section 85-205 (b). 

- 3 01d Dearborn Distributing Co. v. Seagram Distillers Corp., 299 U. S. 183, 193, 
198 (1936). 

"As reported in THE DAILY MISSOULIAN, November 5, 1960. 
L "'Carretta himself, however, weakens the force of this argument in granting 
that its benefits are largely lost by ineffective enforcement. CARRETTA, 
op. cit., supra, n. 1, 175-180. 

62 



Second Provision 

Whether or not any reference is made to the second provision of 
this statute in the contract itself, by that provision, any person with 
knowledge that it is a fair-traded article who sells at less than the 
fixed price is liable under the Act; thus, as to third persons, the duty 
is statutorily imposed directly; contract is not the direct source of 
the duty. L><J Counsel's argument in the pending Montana Supreme 
Court case cited above actually was directed primarily at the second 
provision of the Act. And that argument suggests something of the 
ambivalent if not chameleon-like nature of this second provision. 
Formally, it purports merely to supplement and further strengthen 
the protection given the owner's property interest in his trade-mark, 
and it may be so rationalized. However, since it creates a statutory 
duty and imposes it on the market community generally, obviously 
the force of its thrust is strongly in the direction of market regula- 
tion generally, and of price restrictions. And, as the above argument 
asserts, this "pure price fixing" is justified at least in part in the 
name of the general welfare; i.e., the public interest in prohibiting 
unfair competition with its asserted ruinous consequences in a free 
market. A little price fixing, to avoid one hundred percent price 
fixing, shall we say? But for the markets and the commodities 
affected, one hundred percent price fixing is intended. 

U. S.-MONTANA LAW CONTRASTED 

To date, the Montana Supreme Court has rendered no controlling 
decision construing the state's Fair Trade Act, though there are at 
least three very active cases in the Courts at present — two in the 
District Court in Billings and the one in the Supreme Court referred 
to above. Therefore, for the present, we must look elsewhere for 
guidance in determining the probable status of this Act in Montana. 



'"Shulman, The Fair Trade Acts and the Law of Restrictive Agreements Affect- 
ing Chattels, 49 YALE LAW JOURNAL, 607, 616: "It is common knowledge 
that the pressure for the passage of these Acts, . . . came not from manufac- 
turers or other trade-mark owners but from distributors — first and foremost 
the retail druggists associations and then other retail and wolesale distrib- 
utors . . . (Their) concern . . . was not for the goodwill symbolized by the 
trade-mark, but for their own welfare. . . . They sought to protect themselves 
against old and new methods of merchandising which threatened their posi- 
tions whether or not the producer or his goodwill were similarly threatened. 
If the producers were also to profit from the scheme, that was an accidental 
incident." Shulman then adds that the Fair Trade Act is but one of a package 
of several devices prescribing "how cost is to be computed." In Schwegmann 
Bros. v. Calvert Distillers Corp., 341 U. S. 384, 388 (1951), Mr. Justice Douglas 
describes the non-signer clause as follows: "That is not price fixing by con- 
tract or agreement; that is price fixing by compulsion. That is not following 
the path of consensual agreement; that is resort to coercion." And he describes 
non-signer enforcement as "a program whereby recalcitrants are dragged in 
by the heels and compelled to submit to price fixing." Id. at 390. 

63 



Federal decisions dealing with state Fair Trade Acts will not be 
particularly helpful in deciding that question. 

The sole source of federal anti-trust policy is legislative, found in 
the Sherman Anti-Trust Act 27 and related legislation. And the Mil- 
lard-Tydings 2S and McGuire Acts, 29 validating state fair trade stat- 
utes, merely give a limited exemption, for interstate commerce pur- 
poses, to state statutes which are interpreted as valid by the states' 
Courts under their Constitutions. In its early 1936 case, the United 
States Supreme Court upheld the constitutionality of this type of 
legislation under the United States Constitution. 30 Hence, under the 
federal legislation, the only remaining question is: How far has 
Congress intended to narrow the scope of the Sherman and the 
Federal Trade Commission Acts by these amendatory statutes? 

Constitutionality 

On the other hand, Montana has a strongly expressed constitu- 
tional provision 31 outlawing any and all forms of monopolistic prac- 
tices, including particularly any kind of agreements intending to 
limit competition either in production or in price. Certainly the 
first provision, authorizing a contractually fixed retail price, always 
involving a considerable number of merchants and a substantial 
part of the market, raises real questions as to its legality under the 
Montana Constitution. 32 Hence, the mere fact that the police power 
does not have to be relied on to support this restriction, since it may 
be said to involve simply the ordinary exercise of contract rights, 
does not resolve the legal doubts in Montana as to its validity. Nor 
does the fact that it is neither the legislature nor a governmental 
agency created by that body which directly fixes the price improve 
the constitutional position of this legislation. Indeed, it may weaken 
it, for the reason that this particular constitutional section is aimed 
precisely and primarily at purported private agreements. 33 That is, 
the question in issue is whether this is not a type of contract which 
is expressly declared to be unlawful by Article XV, section 20, of 
the Montana Constitution. And on this issue, the Supreme Court is 
not faced with the embarrassing question of whether it should follow 
the lead of the United States Supreme Court and raise a very strong 

-' 7 26 Stat. 209 (1890), 15 U.S.C. sections 1-7 (1958). 

28 50 Stat. 693 (1937), 15 U.S.C. section 1 (1958). 

-"66 Stat. 631 (1952), 15 U.S.C. section 45 (1958). 

u, Op. cit., supra, n. 23. 

"'CONSTITUTION OF MONTANA, Article XV, section 20. 

y -Coad, Are Montana's Price Fixing Statutes Valid?, XI MONTANA LAW 

REVIEW, 21, 28-30 (1950). 

ri Op. cit., supra, n. 31: "No incorporation, stock company, person, . . . shall 

directly, or indirectly combine . . . , or make any contract with any person, 

. . . for the purpose of fixing the price, or regulating the production of any 

article of commerce, or of the product of the soil." 

64 



presumption of the constitutionality of social legislation"' 4 so far as 
"due process" is concerned, because here, the constitutional issue 
arises under a specific anti-monopoly provision. 

Non-Signer Clause 

What has just been said refers particularly to the provision in 
the Act authorizing individual, private resale price maintenance 
agreements. In considering the second provision, 85 purporting to 
subject the market generally to the restrictions imposed by these 
price agreements, special attention must be given to its ambivalent 
nature, mentioned earlier. Granting, for the moment, that the first 
provision allowing fair trade pricing contracts is constitutional in 
Montana, the second provision's status remains in serious doubt. If 
this section is considered merely as an adjunct to the first section, 
to aid the producer in determining for himself the value of his trade- 
mark, the argument that the second section must be held to violate 
due process may appear especially persuasive to many. This power 
to set the market value on one's own property by any such action is 
a most remarkable one, at best. The Courts thus may well feel that 
such power should not be allowed to impinge on the individual free- 
doms of others, which have been traditionally exercised in a free 
market. Notwithstanding the United States Supreme Court's early 
ruling of constitutionality on due process and similar grounds, many 
state Courts have ruled the non-signer clause, in particular, uncon- 
stitutional in recent years. 30 

If, however, it be frankly admitted that this power to bind non- 
signers really is given simply as an additional means for restricting 
competition in a free market, then it must be justified as a reason- 
able exercise of the police power. On this analysis, there arise sub- 
stantial questions as to the nature of the evil to be corrected and 
the appropriateness of the remedy proposed, even in those states 
without the express constitutional prohibition of trade restraints of 
all kinds. With that prohibition in Montana's Constitution, the Act 
cannot be upheld simply on a showing of such need as to call into 
operation the state's police power; the question is simply whether 
the authority given private individuals to fix prices comes within 
the constitutional wording prohibiting trade restraints, though ad- 
mittedly the state Supreme Court might be expected to be influenced 
in its constitutional construction by a strong showing of the need 

''Lee Optical Co. v. Williamson, 348 U. S. 483, 488 (1955): "The day is gone 
when this court uses the Due Process Clause of the Fourteenth Amendment 
to strike down state laws, regulatory of business and industrial conditions, 
because they may be unwise, improvident, or out of harmony with a particular 
school of thought. . . ." 

85 RCM 1947, section 85-206; Ibid., section 51-101. 

y( 'At least twenty states, many of them within the last five years, have ruled 
this clause unconstitutional. These are listed below, at note 45. 

65 



for such legislation. On this analysis, too, the non-signer clause 
undergoes a metamorphosis; it ceases to be a mere adjunct of the 
first provision, protecting a private property owner in the substance 
of his ownership, and becomes the dominant provision of the Act, 
for it is only by this means that the pricing practices of the general 
market, even as to the particular commodities involved, can be effec- 
tively regulated. 

Furthermore, this analysis requires supporting rationales quite 
different from those originally used. In addition to the legal objec- 
tions which police power legislation usually has to meet, this law so 
viewed must answer a special objection having considerable force 
because of the unusual way the power is exercised. Here, instead of 
finding an evil and dealing with it directly, the legislature delegates 
to a private party the power to decide whether and how far that 
evil should be dealt with. Hence it may be subject to the special 
charge of unconstitutional legislative delegation of police power. 
This, as we shall see, is the most common basis on which state courts 
have ruled the Act unconstitutional. 

The evil attacked by the Fair Trade Act appears to be the same 
as that dealt with in the Unfair Practices Act — "ruinous cut-throat 
price competition" as exemplified in the pricing practices of the 
early thirties. ?ri Assuming that, under the pressures generated by a 
near-catastrophic depression in that period, price cutting did become 
predatory, generating harms under the existing economic conditions 
that could not be resisted by small business, there is a very real 
question today whether that is not a condition which varies from 
time to time, at least the overpowering effects of which are relatively 
temporary and associated only with extremely abnormal economic 
conditions. If they do not exist today, should the remedies fashioned 
to deal with such temporary evils, even if their efficacy can be 
shown, be continued indefinitely on our books? 38 But responsible 
writers and authorities challenge the effectiveness of the "fair trade" 
device as a remedy, in any case, both on legal and on economic 
grounds. 

FAIR TRADE STUDIES BY GOVERNMENT AGENCIES 

Extended studies by government commissions have questioned 
the appropriateness of fair trade legislation to regulate the market. 
A special Federal Trade Commission report on resale price mainte- 
nance, 30 in 1945, and the report of the Attorney General's National 

:!7 SHULMAN, op. cit, supra, n. 26. 

:!S Cf.; Carretta's insistence that fair trading is a generally effective remedy for 

a continuing small business hazard that must be regulated, in CARRETTA, 

op. cit., supra, n. 1. 
"FTC, REPORT ON RESALE PRICE MAINTENANCE at LX-LXI (1945). 

66 



Commission on Anti-Trust, in 1955, agreed in substance on the fol- 
lowing statement: 40 

Fair-trade pricing is contradictory to the general objective of the 
anti-trust laws — "promotion of competition in open markets." ... If 
the fair-trade acts merely prevented ruinous competition among re- 
tailers, and thereby, in the long run, preserved competition, this might 
well be in keeping with antitrust policy. The fair-trade laws go fur- 
ther, however, and prevent price competition among retailers selling 
fair-traded articles, establishing, in effect, horizontal agreements 
among retailers to sell at fixed prices." 

The conclusions of these responsible governmental studies are highly 
important, both legally and economically. According to them, an 
illegal trade restraint practice is maintained by the Acts, in spite of 
their formal denunciation of it. By the combination of the will of 
the trade-mark owner, expressed in his resale agreement, with the 
statutorily imposed duties of non-signer merchants to observe fair 
traded prices, horizontal price fixing actually results. This is a 
condition which has not only been condemned by the United States 
Supreme Court as violating the Sherman Anti-Trust Act, prior to 
the enactment of the McGuire Act, 42 but which is also formally 
prohibited by the McGuire Act 43 itself, as well as by the state Fair 
Trade Acts. 44 

LEGAL STATUS IN OTHER STATES 

That this remedy is legally inappropriate is further supported by 
recent decisions from no fewer than twenty state Supreme Courts, 45 

^ATTORNEY GENERAL'S NATIONAL COMMISSION ON ANTI-TRUST 
REPORT 1, particularly at 154 (1955). 

4 'Op. cit., supra, n. 12. 

4 -66 Stat. 631 (1952), 15 U.S.C. section 45 (1958). 

J3 66 Stat. 632 (1952), 15 U.S.C.A. section 45 (a) (5). 

"RCM 1947, section 85-207: "This act shall not apply to any contract or agree- 
ment (to make legal) between or among producers or distributors or . . . 
wholesalers or . . . retailers." (Emphasis added.) 

4 'To January 1, 1961, the following states have held at least the non-signer 
clause in their Acts unconstitutional: Arkansas: Union Carbide & Carbon 
Corp. v. White River Distributing, Inc., 224 Ark. 558, 275 S. W. 2d 445 (1955) 
(due process); Colorado: Olin Mathieson Chemical Corp. v. Francis, 134 Colo. 
160, 201 P. 2d 139 (1956) (due process and improper delegation of police 
power); Florida: Miles Laboratories v. Eckerd, 73 So. 2d 680 (1954) (invalid 
use of police power for private, not public, purpose); Georgia: Cox v. General 
Electric Co., 211 Ga. 286, 85 S. E. 2d 514 (1955) (due process); Indiana: 
Bissell Carpet Sweeper Co. v. Shane Co., 237 Ind. 188, 143 N. E. 2d 415 (1957) 
(unconstitutional delegation of legislative power to private persons); Kansas: 
Quality Oil Co. v. E. I. du Pont de Nemours & Co., 182 Kan. 488, 322 P. 2d 
731 (1958) (improper delegation of legislative power); Kentucky: General 
Electric Co. v. American Buyers Co-op., 316 S. W. 2d 354 (1958) (due process); 
Louisiana: Dr. G. H. Tichenor Antiseptic Co. v. Schwegmann Bros. Giant 
Super Markets, 231 L. 51, 90 So. 2d 343 (1956) (improper delegation); Michi- 
gan: Shakespeare Co. v. Lippman's Tool Shop Sporting Goods Co., 334 Mich. 
109, 54 N. W. 2d 268 (1952) (due process); Nebraska: McGraw Electric Co. v. 
Lewis & Smith Drug Co., 159 Neb. 703, 68 N. W. 2d 608 (1955) (due process); 

67 



ruling that at least their non-signer clause is unconstitutional, 
though on a variety of different grounds. Several have stated alter- 
native grounds. 40 As noted above, many of these rulings have been 
made on the basis of improper delegation 47 and/or exercise of legis- 
lative and/or police powers, and several 48 add due process. The Utah 
case, 49 however, is particularly noteworthy for Montana, because 
that state has the same constitutional trade restraint prohibition, 
and their Act was held unconstitutional under that provision. Hence, 
not only are all of the grounds generally relied on by other state 
Courts to strike down this Act available and persuasive in Montana, 
but the additional, explicit constitutional prohibition against trade 
restraints in Montana adds much to the argument that it should be 
ruled unconstitutional here. 



New Mexico: Skaggs Drug Center v. General Electric Co., 63 N. M. 215, 315 
P. 2d 967 (1957) (improper exercise of police power); Ohio: Union Carbide 
& Carbon Corp. v. Bargain Fair, 167 Ohio St. 182, 147 N. E. 2d 481 (1958) 
(improper exercise of police power); Oklahoma: Revlon, Inc. v. American 
Mutual Co., 1959 Trade Cas. No. 69,483 (1959); Oregon: General Electric Co. 
v. Wahle, 207 Ore. 302, 296 P. 2d 635 (1956) (improper delegation; due proc- 
ess); South Carolina: Rogers-Kent, Inc. v. General Electric Co., 231 S. C. 636, 
99 S. E. 2d 665 (1957) (due process alternative holding); Utah: General Elec- 
tric Co. v. Thrifty Sales, Inc., 5 Utah 2d 326, 301 P. 2d 741 (1956) (violates 
Utah's anti-trust section in Constitution); Washington: Remington Arms Co. v. 
Skaggs, 155 Wash. Dec. 1, 345 P. 2d 1085 (1959) (due process); West Virginia: 
General Electric Co. v. A. Dandy Appliance Co., 102 S. E. 2d 310 (1958) (im- 
proper exercise of police power). 

To the above must now be added Montana and Iowa cases, both decided in 
1961. Montana: Union Carbide and Carbon Corp. v. Skaggs Drug Center, Inc., 
18 St. Rep. 42, —Mont.—, 359 P. 2d 644 (entire Act unconstitutional under 
Constitution, Article XV, section 20.) Iowa: Bulova Watch Co. v. Robinson 
Wholesale Co., 29 U. S. Law Week 1157, 2488 (Apr. 4, 1961) (The non-signer 
provision unconstitutionally delegates legislative power to private persons). 
At least four of the above courts, in Iowa, Louisiana, Michigan and Washing- 
ton, had to overrule earlier cases holding their Acts constitutional. 
At present, of the state Courts ruling on their Fair Trade Acts, an apparent 
substantial majority has held them unconstitutional. In Bates, Constitution- 
ality of State Fair Trade Acts, 32 INDIANA LAW JOURNAL, 127, 133 n. 22 
(1957), the author lists fifteen states originally upholding the Acts. In Wash- 
ington Case Law (Note)— 1959: Government Regulation, 35 WASHINGTON 
LAW REVIEW 181, 184 n. 13, the writer names two additional states, making 
seventeen in all, ruling them valid. But four of these now have reversed 
themselves, leaving a net of thirteen states upholding fair trade, and twenty 
ruling fair trade pricing unconstitutional. 
w Ihid. 
"Id. 

is Id. Arguably, a court might give cumulative weight to this statute, on the 
ground that it serves diverse, non-conflicting interests in protecting both the 
private property of the trade-mark owner and in seeking to deal with a 
marketing evil at the same time, possibly making more persuasive the reason- 
ableness of the Act than it would have otherwise — evaluating in the "aggre- 
gate" so to speak. However, if price regulation is what is sought, and there 
is a sufficient need for that to justify the exercise of the police power, it may 
be difficult to support the policy of this Act in leaving its implementation up 
to the discretion of an individual to determine when, where, and to what 
extent the policy should operate — the "delegation" of legislative or police 
power charge still seems to be a very serious objection here. 
'"General Electric Co. v. Thrifty Sales, Inc., 5 Utah 2d 326, 301 P. 2d 741 (1956). 

68 



COAD'S ANALYSIS 

When Mr. Francis Coad, in the MONTANA LAW REVIEW in 
1950, r,,) condemned Montana's Fair Trade Act as unconstitutional, he 
could find very little direct supporting authority for that view. 
Although Coad was prepared to accept the Unfair Practices Act, 
provided that it was strictly limited to true monopolistic practices, 
there was no doubt in his mind as to the unconstitutionality of the 
Fair Trade Act in its entirety. He declared: 51 

In the light of the majority common law rule that resale price main- 
tenance was illegal price fixing, the plain wording of the Montana 
Constitution forbidding contracts fixing prices "in any manner what- 
soever" can hardly be interpreted to allow legislation legalizing resale 
price maintenance contracts. This is reinforced by the interpretation 
given the much more general language of the Sherman Act as for- 
bidding such contracts, until it was specifically amended. 

And, referring to the non-signer clause, Coad adds: 12 

The Montana Constitution flatly forbids an individual to fix prices 
by contract with someone else and the legislature cannot authorize it. 
So the contract on which the price fixing under this type of provision 
would have to depend is void. ... It is within the purpose and intent 
of the Constitutional prohibition. 

The eighteen leading decisions"*" mentioned above, all made since 
1950 and practically all in the span of 1955-1960, lend dramatic sup- 
port to that thesis. 

ECONOMIC DESIRABILITY 

The issues just discussed involve the question of whether resale 
price maintenance agreements are a legally appropriate or even 
permissible method for dealing with the evil of predatory price 
cutting. In addition, current developing merchandising practices by 
the large, integrated merchandisers in contracting for unnamed 
products and placing their own trade-mark on them, encouraged and 
accelerated by fair trading practices, jeopardizes the entire small 
business segment dealing in similar goods. Moreover, a careful 
examination of the traditional assumptions concerning the economic 
consequences of certain marketing practices, the psychological prin- 
ciples relied on in advertising, and consumer reaction to pricing 
policies should throw considerable light on the question of whether 

•"'Coad, Are Montana's Price Fixing Statutes Valid?, XI MONTANA LAW 
REVIEW 21, 28-30, 48-49 (1950). 

:A Ibid., 28. 

r -Id., 29. The only place in which Coad considers the "non-signer" clause is in 
the Unfair Practices Act, section 51-101, where, he insists, it is misplaced and 
so "unenforceable for lack of meaning." Forced to dissent from that con- 
clusion, as I state elsewhere, I am not clear why Professor Coad did not 
recognize it as part of Montana's Fair Trade Act, in section 85-206. 

" ,3 With Montana and Iowa, this number now is twenty. 

69 



such agreements are even economically appropriate as cures for the 
alleged evils. The preponderance of current literature on the subject 
questions strongly the economic soundness of this kind of legislation, 
even in the interest of the producer. 54 The following contrasting 
studies are typical. 

In the article previously referred to, Carretta 5 "' obviously sympa- 
thizes with the view that a competitive evil does exist, for which 
this kind of legislation is appropriate and adequate. Apparently, he 
believes that the retailer's principal need today is more effective 

"'Federal agency reports, supra, n.n. 39, 40; Shulman, The Fair Trade Acts. 
. . , 49 YALE LAW JOURNAL 607 (1940); Fulda, Resale Price Maintenance, 
21 UNIVERSITY OF CHICAGO LAW REVIEW 175, 186-211 (1954); FOR- 
TUNE, Jan. 1949, p. 70; FORTUNE, Apr. 1949, p. 75. Note: The Operation 
of Fair-Trade Programs, 69 HARVARD LAW REVIEW 316-352 (1955), is 
based on a very extended study both of the legal and the marketing problems 
involved in fair trading. It expressly excludes consideration of what the legal 
policy should be, based on consumer interests, so does not pretend to be an 
entirely "balanced" study. However, its examination of the economics of 
marketing is quite extended. On page 343, it cites ". . . some manufacturers 
and attorneys, as praising suits by retailers as a more efficient means for stop- 
ping price violation than ... by manufacturers." And a "number of attorneys 
and businessmen interviewed" favor the joining of manufacturers with the 
local retailer to lessen the expense burden, admittedly very great. Id. 

In recent Congressional hearings, there continues to be vigorous support from 
some sectors of business for fair trade pricing. In the hearings before the 
House Committee on Interstate and Foreign Commerce in 1959, more than 
twenty representatives of manufacturers supported fair trade laws, principally 
on two grounds: 1. Allegedly helps to maintain maximum number of outlets 
by encouraging the small retailer to handle a fair traded product, by elimi- 
nating competition from the larger retailer; 2. Protects good-will value in 
producer's trade-mark. But these claims may ignore the inescapable fact that 
such practice simply encourages large integrated concerns, such as the mail- 
order houses, to offer their own trade-marked goods at much lower prices, 
but still with large profit — new merchandising techniques, possibly hurting 
the small retailer far more than a free market could ever hurt him. 

Numerous retailer representatives also testified, claiming that the small re- 
tailer must be protected from loss leader practices by the larger stores. But 
an effectively administered Unfair Practices Act should suffice for that. 
Customer representatives auite generally opposed the practice, as did pro- 
fessional specialists who insisted that the inevitable result is higher prices 
generally in proportion to the effectiveness of enforcement. See: Hearings 
on H.R. 768, 1253, 2463, 2729, 3187, 5252, and 5602, before the House Com- 
mittee on Interstate and Foreigyi Commerce, 86 Cong., 1st Sess. 71 (1959). In 
Resale Price Maintenance After Twenty-five Years, 54 JOURNAL OF AMER- 
ICAN ASSOCIATION OF UNIVERSITY WOMEN, 195-198 (1961), Mabel 
Newcomer, former economics professor, Vassar, insists that many cut-rate 
stores have bona-fide economies which they are willing to pass on to the 
consumer, and that many small stores have natural economies in low over- 
head, with low prices the only means available to them to compete with the 
larger stores. She concludes with these statements on page 178: 

Today we accept government intervention in our free enterprise system as 
essential to the general welfare. The question is, "What kind of interven- 
tion? And for whom?" In this instance it seems probable that better en- 
forcement of the laws prohibiting unfair competition would offer more 
protection to the efficient small concern than resale price maintenance, and 
serve the interests of the consumer better too. 
"CARRETTA, op. cit., supra, n. 1. 

70 



enforcement of existing Fair Trade Acts. He declares that, "The 
problem which confronts the ethical retailers of today is basically 
one of unscrupulous competition and discriminatory enforcement of 
fair trade agreements by manufacturers."" 1 ' 1 But he makes no note 
of the fact that discriminatory enforcement is the direct offspring 
of the fair trade agreements themselves, which may well cause the 
small dealer far more harm than the Acts can ever possibly make 
up for. Carretta's principal point is that the Federal Trade Com- 
mission should recognize an affirmative duty on its part to take 
whatever action is necessary to eliminate "discriminatory enforce- 
ment" by producers on the ground that such practices are themselves 
unfair competition outlawed by the Federal Trade Commission 
Act/* 7 To date, however, that Commission has refused to so construe 
the Act/' 8 

In striking contrast, a recent extensive note in the YALE LAW 
JOURNAL-" 111 raises very real questions as to whether the assump- 
tions on which this legislation was framed, both as to the nature of 
the evil and the conditions for its correction, are valid. Considering 
each of the arguments generally advanced in support of fair trade 
pricing, on behalf of the owner of a trade-mark to protect its value, 
this excellent commentary questions the soundness of any of them. 
He doubts that resale price maintenance even gives the producer the 
protection and the benefits which he hopes to gain. He also argues 
stoutly that cutting the price of nationally advertised trade-marked 
goods does not decrease the benefits which the advertiser expects to 
get, either from "price" or "quality" advertising. His analysis is 
rational and quite plausible.' 10 Similar views are beginning to influ- 
ence the thinking of many large producers, as the growing trend 
among them to abandon the practice of fair trading shows, though 
this tendency may also have been encouraged in part by the wave 
of adverse judgments on Fair Trade Acts handed down by state 
Courts in very recent years. 

PERSONAL INTERVIEWS WITH DEALERS 

But there is more direct evidence yet raising a real doubt that 
there are evils which Fair Trade Acts can cure in the marketing 
processes today. Specifically, limited spot checks among small home 

™Ibid., 173. 

77 Id., 175 

rs Id., 178-179. 

:u Op. cit., supra, n. 12. 

""/bid., 178-186. At page 178, the author observes: ''While some manufacturers 
have testified for the federal bill, . . . this does not necessarily mean that 
they favor rigid price maintenance. (He) has little to lose — and much to gain 
in retailer good will — by open support of unenforced fair trade." (Emphasis 
added.) 

71 



appliance managers who are in financial trouble challenge the accu- 
racy of Carretta's assertion that, "If the retailers were asked to name 
their most pressing business problem today, their general answer 
would be 'discount houses.' " Although inconclusive, these inter- 
views must cause one to question the correctness of that statement. 

One of these businesses was selected because of various signs that 
it was not doing much more than just staying in business. When 
questioned, this store owner said that while he expected to be able 
to continue in business, he was operating with considerable diffi- 
culty. When asked the cause of his trouble, he named the manufac- 
turers, competition from other stores, and potential consumers as 
all contributing to his marketing problems. He attributed little im- 
portance, however, to a failure to maintain fair trade prices, though 
he did criticize consumers for not taking into account the fact that 
when they bought from him they got extended and expensive serv- 
ice on their appliances not provided by other outlets. 

The second manager was being forced to quit business because of 
an unfavorable sales record. To the direct question of whether dis- 
count houses and a failure of his manufacturer to enforce fair trade 
agreements had been an important contributing factor in his diffi- 
culties, his answer was an emphatic, "NO!" He laid most of the 
blame at the door of the large manufacturers of home appliances. 
There had been a heavy sellers' market in home appliances following 
the war. About 1955, some of the leading manufacturers adopted the 
merchandising practice of going into mass production to reduce unit 
costs, flooding the market with units regardless of the effect on the 
retail market and on their local agencies. Some manufacturers 
showed no concern whatever for their dealers, often loading them 
up with large stocks and then, without warning, cutting wholesale 
prices, leaving the local dealers with large inventories at much 
higher invoice prices. These same manufacturers often transferred 
their agencies to new forms of outlets, such as chain drug stores. 
This particular operator had an agency from a company that did 
what it could to protect its local agencies by crediting them with 
price reductions on new models on any balance due on accumulated 
stocks. But these merchandising practices resulted in such chaotic 
market conditions that this operator finally had to surrender. He 
pointed out that leading trade magazines editorialized against such 
anarchic practices by appliance producers all through 1957-1958. 01 

Defects in Marketing Practices 

Some manufacturers who had fair traded their products aban- 
doned the practice, incidental to this frank flooding of the market 

"'This businessman cited THE ELECTRICAL MERCHANDISER and THE 
MART as the two electrical trade magazines which fought mass production 
in the home appliance field in their editorials for over two years. 

72 



with equipment. Some of these turned later to a modified form of 
pricing agreement, based on a suggested retail price (! - without a for- 
mally legal obligation by the agent to conform. This dealer, how- 
ever, was certain that the so-called "break-down" in fair trade en- 
forcement had nothing whatever to do with his difficulties, which 
were rooted in the much more basic question of what should be the 
merchandising practices and policies of manufacturers with the 
capacity to produce far more appliance units at any given time than 
the market could possibly absorb. He was certain that the highest 
possible degree of production control, correlated with market po- 
tential, was the only solution — though he had no answer on how 
that was to be achieved. He cited with strong approval the practice 
by the leading bowling alley manufacturers, who apparently have 
a practical monopoly on that equipment, of limiting the number of 
alleys (and therefore, facilities) for bowling in each community 
strictly according to population. 

Of course, the electrical appliance industry is not the only one 
which taxes the resources of its local agencies by flooding the market 
beyond consumer potential. We have had much complaint in recent 
years about the auto industry doing much the same thing. This is 
not the place to criticize our whole marketing economy. But the 
analysis which this appliance dealer makes of the causes of his diffi- 
culties as a small businessman surely points to some of the funda- 
mental issues facing the American economy. 

We have become accustomed to think of mass production with the 
resulting lowering of per unit costs as an unmixed blessing. And it 
has been naively assumed that all that is necessary to make the 
production-distribution mechanism work is to provide for mass con- 

"'Variations in merchandising agreements and practices are nicely illustrated 
by the current consignment agreement and unilaterally expressed policy of 
the Sunbeam Corporation, a manufacturer of small electrical appliances. 
Though formerly a staunch fair trader, currently it is operating at least in 
part, under a "consignment" contract available only in those states where 
the "Sunbeam Consignment Plan shall have been instituted." This agreement 
is introduced by the statement that Sunbeam sells certain products produced 
by it and "identified by its trade-marks, brands, or names, . . . which products 
are in free and open competition with similar products. . . ." It then provides 
for consignment of such products to the retail dealer. 

In its unilateral Statement of Sunbeam Policy, it says that: 1. Its products are 
consigned on uniform published discounts from the recommended retail price, 
conforming to the Robinson-Patman Act, to prevent all unlawful pricing; 

2. Condemns strongly any variation from this policy by its distributor-agents; 

3. Though Sunbeam suggests or recommends a retail price, any lawful price 
set by the dealer is solely his business. The product is not fair traded; 4. How- 
ever, the recommended price takes into account the statistically established 
average costs for doing business in the United States; 5. Condemns "bait 
practices" in pricing of all kinds, stating it will cancel contract with such 
dealers; 6. However, up to fifteen percent cuts in advertised prices will not 
be considered "bait;" 7. It also provides for "special promotional" models, 
issued by it on consignment, for that purpose, providing that its advertising 
presents it on that basis. 

73 



sumption by adequate wages, so that endless expansion of the econ- 
omy results. But do not these problems demonstrate the need for 
continuously modifying our production-distribution techniques to 
keep them compatible? When one part of that production-distribu- 
tion complex achieves new potentials, every other part must be 
modified accordingly if the entire process is to remain homogeneous. 
In his THE AFFLUENT SOCIETY, Galbraith insists that:™ 

The shortcomings of economics are not original error but uncorrected 
obsolescence. The obsolescence has occurred because what is con- 
venient has become sacrosanct. . . . The affluent country which con- 
ducts its affairs in accordance with rules of another and poorer age 
also foregoes opportunities. And in misunderstanding itself it will, 
in any time of difficulty, implacably prescribe for itself the wrong 
remedies. 

The appliance dealer referred to above correctly concludes that, 
quite aside from the constant press for concentration in modern in- 
dustry, the problems which he and thousands of others like him face 
are much more fundamental and far-ranging than simply maintain- 
ing minimum prices per unit on home appliances. Fair trade enforce- 
ment does not even suggest those problems, and it is very doubtful 
that it provides any part of an effective remedy for them. 

ENFORCEMENT OF FAIR TRADE ACTS 

"^oth Carretta and the author of the note mentioned above join 
in their concern about the enforcement of the Fair Trade Acts; but 
even here, they are concerned with different aspects of the enforce- 
ment problem. As stated, Carretta is primarily concerned with "dis- 
criminatory enforcement" by the trade-mark owner, who proceeds 
against the small dealer but winks at the violations of the large retail 
discount houses, with grievous injury to the former. 04 Carretta 
would correct this evil stemming directly from the Fair Trade Acts 
themselves by persuading the Federal Trade Commission to proceed 
against such discrimination.""' On the other hand, the YALE note 
stresses the practical difficulty of securing uniform enforcement, 
on any basis, in a very thoughtful analysis of enforcement limita- 
tions. 00 

One of the principal limitations is the common requirement of 
a showing of damage by the plaintiff, which narrows the class of 
potential plaintiffs, both among individual dealers and associa- 
tions. 07 



,,:, John Kenneth Galbraith, THE AFFLUENT SOCIETY, 4-5 (1958) 

'"CARRETTA, op. cit., supra, n. 1, at 174-175. 

nbid., 175-176. 

m Op. cit., supra, n. 12, at 186-191. 

a7 Ibid., 172. 

74 



The note says, 08 

The highest legal roadblock to the small retailer's success is a re- 
stricted judicial construction of the criteria for standing to sue. The 
state acts normally provide that "any person damaged" by the illegal 
price cutting may bring suit, and the courts have properly interpreted 
this provision to bar actions by retailers not in competition with the 
price cutter. 

The note lists only three states as having a broader criterion for 
standing to sue, New Jersey, Pennsylvania, and Ohio. 00 But it would 
seem that at least Montana should have been added to this list. Right 
here, the inclusion of the fair trade non-signer clause in Montana's 
Unfair Practices Act may become quite important — something to 
which Professor Coad took vigorous exception in 1950. To the 
extent that, under the Fair Trade Act, injury as a limitation on the 
standing to sue is a roadblock, it can be avoided by a detour through 
the Unfair Practices Act. 70 Although the non-signer section there 
also contains the damage 71 condition for suing, the Act's general 
procedural sections 72 clearly authorize any one or more of several 
different groups of interested parties, including both individuals 
and trade associations, to enforce any part of the Act whether dam- 
aged or not. 

CONCLUSION 

With at least three active cases in state Courts concerning the 
legality of the Fair Trade Act in Montana, one already argued before 
the Supreme Court and the others in a District Court, Montana 
should soon have a direct ruling on the Act's constitutionality — at 
least as to the non-signer provision, and very possibly on the whole 
Act. While it is impossible to forecast the result with certainty, the 
present economic climate combined with the very strong recent 
trend in the state Courts, which are approaching unanimity in de- 
claring the Act unconstitutional, together with our specific consti- 
tutional prohibition against trade restraints of all kinds, suggest 
that there probably is better than an even chance that the Montana 
Court will rule the Act unconstitutional. 



*"Id., n. 28. 

7 "RCM 1947, section 51-101, contains the non-signer provision, calling a viola- 
tion "unfair competition." 

71 RCM 1947, section 51-101, says that such "unfair competition is actionable at 
the suit of any person damaged." 

7:J RCM 1947, section 51-111, provides that any person, firm, etc., may enjoin 
any acts in violation of sections 51-101 (which includes the non-signer clause), 
to 51-108. Further, id., section 51-113, grants plenary power to the Trade 
Commission to enforce the Act, directing it to prevent any person from vio- 
lating any of the Act's provisions. 

75 



POSTLUDE 

Since the above was written, the Montana Supreme Court has 
published its judgment in the Union Carbide case 73 testing the con- 
stitutionality of Montana's Fair Trade Act. In a unanimous opinion, 
the Court ruled that the entire Act is unconstitutional and void, 
under Article XV, section 20, "declaring that no person or incorpo- 
ration, . . . can directly, or indirectly, make any contract which fixes 
the price of any article of commerce in any manner whatever." 74 
Hence, it found it unnecessary to consider any further grounds for 
attacking the Act's constitutionality. 75 On the basis of this decision, 
two similar suits, filed in Billings by the Olin Mathieson Chemi- 
cal Corporation and the Remington Arms Company, respectively, 
against one Billings firm, were dismissed with prejudice, by stipula- 
tion. 7,i But even this Supreme Court decision ruling the Fair Trade 
Act unconstitutional may not permanently settle the matter for the 
state. Though not involving Montana's legal barriers, current pres- 
sures on Congress in this field may be noted briefly, since bills 
before Congress much of the time since 1957, if enacted, would cover 
a large part of Montana's trade. 

Since 1957, Congress has been lobbied very actively and aggres- 
sively 77 for a law that would apply directly to interstate commerce 
and to all goods "held for sale after shipment in commerce" 78 to 
make fair trade pricing legal. The bill being pushed would be much 
broader than most state laws, since it is not restricted to trade- 
marked goods 70 and since it authorizes any proprietor of merchan- 
dise to establish its retail price simply by stipulation 80 and notice 
thereof to his distributors. Further, it would make it unlawful for 
such distributor or any other distributor "with notice of an applica- 
ble minimum resale price" to sell or offer to sell such a product for 
less. 81 



7;i Union Carbide and Carbon Corp. v. Skaggs Drug Center, Inc., 18 St. Rep. 42, 
—Mont.—, 359 P 2d 644 (Feb. 10, 1961). 

"Id., 359 P 2d 651, 654. 

7n Loc. cit. 

7 "On the basis of personal correspondence with defense counsel, dated Febru- 
ary 20, and March 10, 1961. 

"Op. cit., supra, n. 12, page 168; Conant, Resale Price Maintenance: Constitu- 
tionality of Nonsigner Clauses, 109 UNIVERSITY OF PENNSYLVANIA LAW 
REVIEW 539 (1961). 

7H CONANT, loc. cit., supra, n. 77. 

78 As given in CONANT, loc. cit., supra, n. 77, at 539, section 6 of the principal 
bills, the key section contains no trade-mark limitation whatever. It would 
make it lawful for the owner of any merchandise, "to establish and control, 
by notice to his distributors, stipulated or minimum resale prices. . . ." 
(Emphasis added.) 

""Quoted supra, n. 79, and emphasized. 

M CONANT, loc. cit., supra, n. 77, at 540, quoting section 7 (i) and (ii) of the 
proposed legislation to this effect. 

76 



The supporters of this legislation seem to be having considerable 
trouble in generating enthusiasm for it, at least in the present 
economic climate. And while if such legislation ever were enacted 
it probably would withstand attacks on the ground of substantive 
due process, very possibly the Supreme Court would rule that it 
unconstitutionally delegated legislative power to private individuals, 
as is argued in a recent careful study of the problem. 82 It is hoped 
that the United States Supreme Court would examine the issues 
raised by this Act more realistically now than it did in the "Old 
Dearborn" case,* :>> In the light of its obvious purpose to fix prices for 
products horizontally, throughout the retail market, rather than 
simply to protect "good will." 

1963 ADDENDUM 

Nowhere is the difficulty of forecasting trends in market practices 
and moods more dramatically demonstrated than in the current 
developments in the administration of the Unfair Practices Act, and 
in the shifting fortunes of the resale price maintenance principle in 
these United States over the past two years. Practically in the 
concluding remarks above, written only two years ago, we stated 
that, after knocking at the doors of Congress for over fifty years 
seeking a federal Fair Trade Act, its supporters were continuing to 
have trouble in generating enthusiasm for that principle in Con- 
gress, "at least in the present economic climate." 

But now, within that brief span, resale price maintenance seems 
suddenly to have caught on with the national lawmakers. The bill 
being considered 84 now calls this form of price fixing by the highly 
"moral" sounding, but euphemistic phrase, "quality stabilization." 

Though Fair Trade Acts commonly have been supported by a 
union of manufacturers and retailers, most of the recent pressure 
for a federal Fair Trade Act apparently is coming from various trade 
associations allegedly representing the small retailers. THE WALL 
STREET JOURNAL tells us that, "Some 70 trade associations, led 

S -Ibid., at 551-3. Conant concludes that due process is an insubstantial basis on 
which to attack Fair Trade Acts, both because "substantive due process" does 
not have solid enough historical support, and because the United States Su- 
preme Court currently rejects it as a basis for attacking economic legislation. 
He believes, however, that the non-signer clause is quite susceptible to attack 
on the ground of "unconstitutional delegation of legislative power." Ibid. 

x;i United States v. McKesson & Robbins, Inc., 351 U. S. 305 (1956), ruling that 
a fair trade contract between a manufacturer and a wholesaler, both of whom 
engaged in some measure in competition for retailers' business, was a "hori- 
zontal" agreement not exempted by the McGuire Act, under the Sherman 
Anti-Trust Act, gives some reason to expect the Supreme Court to examine 
such legislation at least critically. 

M To the effect that the bill tendered Congress in 1960-61 was not restricted to 
trade-marked goods, see CONANT, supra, n.n. 79 and 77. A circular letter, 
addressed to the President of the United States, and asking that he veto H. B. 
3669, if it should be passed, indicates that the bill so limits. 

77 



by the National Association of Retail Druggists, rank the bill as 
their top legislative desire this year." 8 " 5 Those supporting federal 
resale price maintenance insist that federal price protection is 
absolutely necessary to save "the corner druggist and appliance 
dealer" from disappearing "as discounters intrude deeper and 
deeper into their market." 80 

Those opposing that principle insist that the merchandising tech- 
niques developed by the discount houses, wherein they forego the 
giving of many services, conveniences, and other high cost selling 
techniques in order to bring products to the consumers at the lowest 
possible price, serve a very real need for a very large segment of 
consumers. They add that this kind of selling also has a wholesome, 
therapeutic effect on the entire competitive market, in that it keeps 
everybody "on their toes." This many traders do not like, even 
though it is in the finest tradition of the free market, one of the 
greatest values of which has been to provide the best goods possible 
to the consuming public at the lowest price possible. On this argu- 
ment, the public continues to be entitled to demand that the re- 
sourceful and the ingenious in developing merchandising practices 
who make substantial price reductions possible be rewarded rather 
than drummed out of business, or fined or jailed. Indeed, consumers' 
wants are so varying today, and the market is so large, they say, 
that there is plenty of room for both "luxury" and "economy" selling. 

The champions of the Unfair Practices Act and of resale price 
maintenance in whatever form presented would do well to ponder 
the admonition from Galbraith, repeated here: 87 

The shortcomings of economics are not original error but uncorrected 
obsolescence. The obsolescence has occurred because what is con- 
venient has become sacrosanct. . . . The affluent country which 
conducts its affairs in accordance with rules of another and poorer 
age also forgoes opportunities. And in misunderstanding itself it will, 
in any time of difficulty, implacably prescribe for itself the wrong 
remedies. This the reader will discover is, to a disturbing degree, our 
present tendency. 

In any event, the proposed federal law may not be operative in 
Montana. Apparently, though H. B. 3669 directly authorizes manu- 
facturers to set resale prices on branded goods entering interstate 
commerce, it is not applicable in states positively prohibiting the 
practice. Few, if any, states have such express statutes. But the bill, 
even if passed, probably would not affect business in Montana for 
an even more compelling reason. Montana's constitutional prohibi- 
tion against every kind of trade restraint, including particularly 
price fixing as interpreted recently in Union Carbide v. Skaggs Drug 

S THE WALL STREET JOURNAL, Vo.. XLIII, No. 225, Sept. 3, 1963, page 1. 
The letter, described above, note 84, also supports these general statements. 
m Ibid. 
87 John Kenneth Galbraith, THE AFFLUENT SOCIETY, 4-5 (1958). 

78 



Center, Inc.** ruling the Montana Fair Trade Act unconstitutional, 
should be the clearest statement possible of Montana's law against 
such price fixing. Certainly the state should do everything in its 
power to resist the extension of any such federal statute to Montana 
business. 



139 Mont. 15, 359 P. 2d 644 (1961). 

79 



Chapter VI 

Barbers and Barber Shops, 
Beauticians and Beauty Shops 

INTRODUCTION 

Both in the character of their trade and in the legal problems 
posed by attempts to regulate them, barber shops and beauty shops 
differ in several important respects from any of the other fields 
considered in this study. Apparently, the barber business is a clas- 
sical example of the remark recently made by the legal counsel of 
the Montana Trade Commission: "Everybody is in favor of compe- 
tition — for the other fellow." 1 Possibly there are special reasons in 
the character of the trade itself explaining its efforts for many years 
to secure regulation of prices, first in the form of "self-regulation" 
and finally through governmental agencies; at any rate, efforts to 
stabilize prices by the majority of barbers have as long a history as 
in any of the common trades and services. 

At least some of the problems of the barber-beauty business spring 
from the nature of the "commodity" it has to sell. Of the four prin- 
cipal regulated areas studied here, these trades are the only ones 
that have only personal services, in the form of skills and crafts- 
manship, for sale. The ease with which great numbers of people 
can acquire these skills and the minimum of capital investment re- 
quired to enter the business, together with their tendency to sell 
their time at almost any price under certain economic conditions, 
have complicated the problem of keeping competitive practices 
within healthy limits here. So, for a long time before the state 
authorized regulation by a political agency, this business tried to 
control its prices by two principal means: 1. Agreements among 
the barber shop owners themselves — the master barbers; 2. Agree- 
ments between these owners as a class and their employees, the 
journeymen barbers, acting through their unions. 2 Control by these 
means was only partly successful. 

j This statement was made in personal correspondence dated November 15, 
1960, as follows: "Competition is something that Americans have come to 
revere and each citizen is of the firm conviction that it should flourish in the 
other fellow's business." 

-An adequate treatment of the non-statutory methods available to the trade 
for regulating prices, and of the legal problems raised thereunder, is found in: 
Note: Price Fixing Within the Barber Industnj, 34 INDIANA LAW REVIEW 

80 



These agreements raised nice questions as to their legality in 
many states. The answers to these questions, which generally 
turned on whether such agreements were an illegal restraint of 
trade, have varied. :{ Our concern in Montana, however, is with 
statutes which regulate barber-beautician businesses in considerable 
detail, by means of the licensing power of boards created for the 
purpose of giving examinations to those wishing to enter the busi- 
ness, by regularly inspecting the shops in the name of the public 
health and safety, and finally, by establishing fixed prices within 
communities, under certain conditions as provided for in the Acts. 
Although they have been amended, and the scope of the boards' 
jurisdiction enlarged substantially since their original adoption, 
these regulatory codes were first adopted in 1929, several years be- 
fore any of the other principal regulatory codes. 

Although there appear to be real questions as to the constitution- 
ality both of the Unfair Practices Act and the Fair Trade Act, or 
parts of them, under Montana's anti-trust provision, it is 4 more 
doubtful that the present codes for barbers and beauticians can be 
questioned on that basis, for two reasons: 1. The wording of the 
Constitution hardly can be stretched to include strictly personal ser- 
vices under its prohibition; 2. It is arguable whether such power to 
fix prices is vested in the members of the trade, though they may 
petition the Barber and Beautician Boards to that end. However, 
it is the Board that officially establishes the prices set for any given 
community. The constitutional prohibition is directed against "pri- 
vate agreements and transactions" tending to be monopolistic in 
character. But this second issue must be discussed more fully be- 
low, in considering whether this legislation unconstitutionally dele- 
gates legislative power to the trade. 

621-638 (1959). As will be noted below, until last year there had been no 
new price schedules or proposed revisions submitted to the Board of Beauty 
Culturists since the initial submission very shortly after the law was first 
enacted. There is reason to believe that the substantial amount of stability 
maintained in price schedules since then has been in no small measure the 
result of their approval and adoption by the unions in the various communi- 
ties. With occasional exceptions, prices have been most stable where the 
union was the strongest. (These conclusions are derived from interviews.) 
In most communities, the barbers and the beauty culturists are members of 
separate union chapters; in a few, however, they belong to a single chapter. 
y The broad legal question generally involves the scope of constitutional and 
statutory provisions regulating "restraints of trade" when the court seeks an 
answer to the question, "Is either a 'service' or 'labor' exempt under the 
controlling law, constitutional or statutory?" Services are covered by some 
constitutions and statutes, but not by others. There is a similar diversity of 
decisions on whether they are covered under the common law concept of 
trade. Cf.: Carlton v. Manuel, 64 Nev. 570, 187 P 2d 558 (1947) (not covered 
by the common law) with Atlantic Cleaners & Dyers v. United States, 286 
U. S. 427 (1932), granting an injunction against price fixing in the cleaning 
industry. There is a similar diversity of rule on when a combination of labor 
constitutes a restraint of trade. 
'CONSTITUTION OF MONTANA, Article XV, section 20. 

81 



EARLY LEGISLATION 

Both as originally enacted and in their present form, the Barber 
and the Beauticians (Cosmetology) Codes are very similar, differ- 
ing only in relatively minor particulars. As enacted in 1929, 5 how- 
ever, neither attempted to regulate prices. They were concerned 
primarily with providing for examinations to determine the skill 
of those wishing to engage in these trades. Further, neither Act set 
forth detailed regulations to insure the protection of public health. 
Instead, they simply provided that the regulating Boards, subject 
to the approval of the State Board of Health, should make such 
regulations as were deemed necessary to give such protection. From 
the first, however, both Acts extended the jurisdiction of the two 
Boards to the schools providing training for these trades, as well 
as the shops themselves. In 1939 the Barber Act and in 1941 the 
Beauticians Act were amended to provide for extensive price con- 
trol. 7 

CODE ANALYSIS 

Barber Code 

The Barber Code in its present form will be summarized first, and 
then the principal similarities and differences between the two 
codes will be noted. 8 

1. Defining "barber"" to establish the scope of the Act, the statute 
requires that barber shops, schools and colleges "be operated and 
maintained in a sanitary condition so as to preserve the public health 
and prevent the spread of disease." 30 Thus, it firmly bases its regu- 
lations on the exercise of the "police power" to protect the public 
health and safety. 

2. It sets up extensive "certification of registration" requirements for 
barbers, composed of "barbers" and "apprentices," and for the li- 
censing of shops and schools, along with a fee schedule for each." 

3. It details the "health, sanitation and cleanliness requirements and 
standards" for all establishments, prohibiting particularly barbering 
with an infectious disease, 12 and provides for the revocation of the 
license of anyone violating these requirements. 13 In addition to the 



"Barbers and Barber Shops: LAWS OF MONTANA 1929, Ch. 127, RCM 1935, 
sections 3228.19-3228.30; Cosmetology: LAWS OF MONTANA 1929, Ch. 104, 
RCM 1935, sections 3228.1-3228.18. 

fl RCM 1947, section 66-403; Id., sections 66-801 and 66-803. 
7 LAWS OF MONTANA 1939, Ch. 183; Id., 1941, Ch. 80, section 2. 
s This analysis is based on the law as expressed in the 1947 Codes. Though the 
Cosmetology Code was amended in 1955 (LAWS OF MONTANA 1955, Ch. 
20) and the Barber Code in 1957 (Id., 1957, Ch. 237), neither amendment was 
substantial for our purposes. 
"RCM 1947, section 66-402. 
1(, Id., section 66-401. 

"Id., section 66-403 (A) (B) (C); and section 66-403 (D) (E) (F). 
v2 Id., section 66-401 (a). 
is ld., section 401 (a). 

82 






sanitation requirements, additional grounds for license revocation 
are: a. Conviction of a felony; b. Gross malpractice; c. False adver- 
tising; d. Using another trade name than one's own; e. Habitual 
drunkenness or narcotic addition; f. Practicing without being prop- 
erly licensed; g. Violating any of the price schedules approved by 
the Boards. 14 One of the most interesting and most disturbing things 
about this list of regulations is the range of subject matter and con- 
duct which the Code proposes to regulate in the name of the "public 
health." (This will be considered further below.) 

4. A Barber Board of three members with at least five years practical 
experience, appointed by the governor for three year terms, 1 "' is cre- 
ated, with power to give examinations to test the applicants' skill 16 
(exempting those practicing at the time of the Act's passage) 17 and to 
inspect all barber businesses at any time during business hours to 
check on compliance by the owner. 18 

5. This Board also is granted the power to establish officially for 
different communities a schedule of set prices for the various barbers' 
services performed. 1 " The question of whether such uniform price 
schedule should be established in a particular community is to be 
initiated by a request for approval of such a proposed schedule, 
approved by at least seventy-five percent of the barbers in the 
community, which includes the area within a radius of three miles 
beyond the town limits.-" Following "such investigation and proofs 
as the condition permits and requires," if the Board is convinced 
that the prices proposed are sufficient to support the necessary sani- 
tary and health requirements, it will approve the schedule, thus 
establishing prices set by the state.-' 

6. Receiving no appropriations from the state, the Board is required 
to finance its operations exclusively from fees received." The mem- 
bers are paid fifteen dollars daily and actual expenses while on Board 
business.- 8 (Until 1957, they received only ten dollars daily.) 1 " 1 

7. It is a misdemeanor carrying a $25/$200 fine or a 10/90 day jail 
sentence together with license suspension or revocation to "willfully 
violate or persistently fail to conform to the Act or the Board's law- 
ful regulations." 2 "' 

Beauticians Code 

The Code regulating "cosmetology" (i. e., beauty culture and 
shops), as amended, is quite similar in most substantial respects to 
that regulating the barber trade. The ultimate power to fix prices 
is vested in the Board under both Acts, although the expressed au- 



u Id., section 66-403 (H). 
v 'Id., section 66-406. 
1H 7d., section 66-409 (1). 
''Id., section 66-404. 
"Id., section 66-403 (G). 
'"Id., section 66-409 (2). 
■"'Id. 

2 >Id., section 66-409 (2) (3) (4). 
-Id., section 66-408. 
-"Id., section 66-408. 

- 4 LAWS OF MONTANA 1957, Ch. 237, section 2, increased the per diem from 
$10 to $15. 
L> "'RCM 1947, section 66-410. 

83 



thority of the Board for beauticians to do so, extending either to "an 
incorporated town or city" or to an entire county, is somewhat 
broader than the Barber Board's authority. The Beauticians' Code 
does not specify detailed requirements for the operation of a shop 
to assure health protection as does the Barber Act, retaining instead 
the original 1929 provision that, "The Board, subject to the approval 
of the State Board of Health, shall prescribe such sanitary rules as 
it shall deem necessary. "- (i Another important difference is that the 
Beauticians' Code retains the idea of "self-regulation" by the busi- 
ness involved in the requirement that the "State Examining Board 
of Beauty Culturists" be composed of three members, appointed "by 
the governor from a list of six persons recommended by the Mon- 
tana State Hairdressers' Association," with at least five years ex- 
perience and five years residence in Montana 1 ' 7 — substantially the 
same kind of qualifications as are found in the Unfair Practices Act 
and in the Act regulating the photographic business. The same per- 
sonal qualifications are required for the Barber Board, but its candi- 
dates are not chosen by any trade association.- 8 The principal dif- 
ference between the grounds for suspension or revocation of a li- 
cense in the two Acts is that the Beauticians' Code does not make 
the "commission of a felony" a ground therefor, though it does re- 
quire a "good moral character" even to qualify for a license.- 9 A 
right of appeal to the District Courts lies under both acts. 80 

Price Fixing Regulations Analyzed 

However, a careful examination in detail of the provisions authori- 
zing the Board to fix prices uncovers a series of ambiguous pro- 
visions in both Acts, which may raise rather disturbing questions 
as to whether these Acts vest that "exclusive power to fix prices" 
in the Boards which is required, by abundant authority, to protect 
these Codes from the charge of attempting an unconstitutional dele- 
gation of price-fixing power to the trade. Moreover, neither Act 
expressly requires any kind of public hearing to establish the facts 
on which to determine what prices should be, as do the Unfair Prac- 
tices and the Milk Control Acts. In fact, in the past, the Beauticians' 
Act expressly made it optional with the Board whether it should 

- v Id., section 66-812. 

2: Id., section 66-804. 

" s Id., section 66-406. 

-'Id., section 66-803. 

:! "Barber Act: RCM 1947, section 66-403 (I); Cosmetology Act: Id., section 66- 
811. Both Acts seemingly use the terms "certificate of registration" and "li- 
cense" interchangeably. But the certificate of registration appears to be the 
formalized written evidence that the applicant is licensed, i.e., is qualified to 
practice barbering or to operate a school. The sections just cited grant the 
right of appeal either to an individual practitioner, a shop owner, or to a 
school, for adverse Board action, generally. 

84 



hold a hearing of any kind.' 51 The Barber Act euphemistically pro- 
vides that it determine prices, following "such investigations and 
proofs as the condition permits and requires." 3 - It does not, at any 
point, provide for any power in the Board to initiate and determine 
prices at its own discretion. Under this Act, apparently both origi- 
nal price schedules and subsequent modification of them must be 
either recommended by the large majority of the trade affected or, 
if an amendment of existing prices, approved by that group. 83 The 
Beauticians' Code, on the other hand, has long provided that its ad- 
ministrator may set prices at variance with those recommended, if 
necessary, "to provide healthful services to the public and keep the 
shops and parlors in a safe, sanitary and attractive condition. . . " 
or change existing price orders, either upon petition or on "the 
Board's initial motion."' 54 The Board itself may not have been aware 
of its powers in this respect; at least it apparently has not imple- 
mented this statutory authority in its administrative practice. 35 
However, this Board has not had the original power to extend price 
control to new areas. 

The provision allowing the administration to set prices "to pro- 
vide healthful services, etc.," is a key statement in the standards 
and criteria stated in the Code for determining prices, i.e., involv- 
ing the question of whether sufficient "legislative guides" have been 
given the price control agency to satisfy constitutional requirements 
for the "delegation of legislative power to fix prices to any admini- 
strative agency. 3 ' 1 In general, these standards, as set forth in both 
Acts, are very similar, being equally vague and brief. The criterion 
quoted above expresses the substance of the standard imposed, 
though the Boards under each are exhorted to "take into consider- 
ation the necessary costs incurred in the city or town" in maintain- 



ed., section 66-806 (1). 
:i2 Id., section 66-409 (2). 
:u Id., section 66-409 (4). 

:u Id., section 66-806 (4). See nn. 85, 86 and 87, and text on importance of this 
difference. 

85 In correspondence dated Feb. 27, 1961, the Board's secretary states that, "No 
notice is sent to the various counties when their price code becomes past date 
of limit set in their first petition since it is difficult to get this group to act 
and since it appears to control the price cutters as it is." Apparently the 
reference to "date of limit set in their first petition" is based on the provision 
in the Code saying that, "the board may approve such agreements for the 
term proposed therefor or for such shorter term as the board may deem 
proper." This provision is not found in the Barber Code and would appear to 
have little substantive limitation on Board action, in any case, since the Board 
is empowered by section 66-806 (4) to act on its own initiative at any time 
following a schedule approval to review that schedule. 

■"'These requirements are spelled out in detail in the Schechter and the Ryan 
cases, the leading United States Supreme Court decisions invalidating the 
NIRA, and will be discussed further below. 



85 



ing a "barber shop in a clean, healthful and sanitary condition" 87 and 
"in maintaining shops or parlors in sanitary and attractive condi- 
tion." 38 But both Acts authorize the imposing of price control only 
on those communities or counties in which the necessary majority 
of members of the trade have asked for such control. 89 

ADMINISTRATION OF THE ACTS 

Barber Act 

Required to conduct examinations of applicants for certification 
of registration at least four times a year, 40 the Barber Board meets 
four times annually. 

The Board's secretary reports that barber prices are regulated 
in one hundred and thirty-seven cities and towns in Montana, and 
that they have meetings "to determine if we should approve the 
(price schedule) request," and also that they investigate operating 
costs in the community involved. 41 However, they do not hold formal 
hearings on suggested price schedules nor, apparently, do they at- 
tempt any kind of detailed operating cost analysis to determine 
"reasonable" prices, as does the Cosmetology Board discussed below. 

The price schedules generally approved are somewhat lower in 
the smaller rural communities than in the larger cities. For example, 
Missoula and Kalispell have the same price schedules, but prices in 
the small communities lying between, and in Hamilton, to the south 
of Missoula, are substantially lower. 

Although the Board "may, at its discretion," appoint inspectors 
with authority to inspect barber shops (to maintain health standards 
and check on the Act's compliance), the three member Board does 
its own inspecting, at least once a year. 

This Board has resorted to Court action to enforce its regulations 
only once, states an officer, and that only within the last year. A 
shop in northern Montana, which had been charging the regular 
price of one dollar and fifty cents for a hair cut, lowered its price 
to one dollar in 1960 after moving from one part of town to another. 
Reportedly, not certain of the Act's legal status as a straight price 
fixing statute, the Board charged the owner with operating an un- 
sanitary shop. The District Court ruled in favor of the Board and 
the defendant failed to appeal to the State Supreme Court. This 
spring, 1961, the Board revoked the defendant's license and certifi- 
cates of registration on the express ground that he was violating the 



37 RCM 1947, section 66-409 (3) for the Barber Act. 
* H Id., section 66-806 (3) for Beauty Shops. 

™Id., section 66-409 (2) (3) (4), and section 66-806 (1) (2) (3). 
4 "RCM 1947, section 66-409 (1). 

"'Correspondence dated Feb. 27, 1961, and March 8, 1961, from the secretary 
of the Barber Board and personal interview. 

86 



Act by offering his services at rates below those approved by the 
Board. At this writing, reportedly, the statutory period for filing a 
petition challenging the revocation in the District Court has not ex- 
pired, so final resoluion of this proceeding is still pending. 

Cosmetology Board 

The Beauticians' Board reports that "very few of the counties 
carry a current price as to their charges." 4 - The report adds, how- 
ever, that "They are observing the ones which were set at the time 
the law went into effect. " 4:{ Presumably, a large proportion of count- 
ties submitted price schedules which were approved when the Act 
first went into effect, but had done little further in the way of 
price regulation prior to late 1959 or early 1960. The Board feels, 
however, that the very existence of the old schedules, though "out- 
dated," has been generally effective to prevent serious price cutting. 

In the past, apparently, price schedules generally have been 
established on a rather informal basis. True, the Board's secretary 
states that "We definitely do hold hearings. We make verbatim 
copy of testimony and act on the results of the information re- 
ceived." 44 This describes current practice, however, which reflects 
recent changes in policy. 

Within the past two years, the Beauticians' Board has indeed 
adopted a more aggressive program for supervising and regulating 
price schedules for beauty parlors. It has consulted with the At- 
torney General's staff to review the adequacy of its procedures for 
investigating and establishing price schedules. 45 In 1960, it held at 
least two public hearings on proposed schedules — one each for Gal- 
latin (Bozeman) and Yellowstone (Billings) Counties 4 ' 1 — preceded 
by mailed personal notices to shop owners including a request that 
they notify each of their licensed employees of the date and place of 
the public hearing. Following the Gallatin County hearing, the Board 
issued a formal "notice to counties applying for price code infor- 
mation." 47 This notice included the statement that: 



4 ~Loc. cit., supra, n. 35. 

ri Id. 

"In a letter dated March 8, 1961. 

'"'This is clearly indicated by a Notice to Counties Applying for Price Code 
Information issued by the Board of Beauty Culturists shortly after Feb. 13, 
1960, setting forth the information and data that should be included in a 
price schedule application to assure its adequacy. 

iH Loc. cit., supra, n. 45, states that a hearing on the Gallatin County request 
had been held on February 13 and that on March 28, 1960, a notice of a 
public hearing in Billings, set for April 10, 1960, was sent to Yellowstone 
County operators with a request that they inform their own employees. The 
stated purpose of the hearing was for "re-setting the minimum price schedule 
for the county of Yellowstone." 

4: Loc. cit., supra, n. 45. 

87 



In order to establish prices which will be recognized in Court, it is 
necessary to make findings based on the necessary cost to maintain 
and operate a beauty salon in a sanitary manner which will meet 
the requirements of the State Law and the State Board of Health. 

To do this, it is necessary to select at least three types of shops, for 
instance, your largest, and one that is a home shop and then a small 
shop in the business district. Follow the enclosed copy for figures 
to bear out findings. 

It also accepted as a model for the rest of the state the operating cost 
data which Gallatin County submitted in support of its application 
for a revision of its price schedule, saying: 

The Pricing Committee of Gallatin County presented a form which 
seemed from all aspects to be perfect for the basis of establishing 
costs of operating a shop. This form has been accepted and will be 
copied for your convenience in establishing the costs in your County. 

This form enumerates the items to be included in computing oper- 
ating shop costs. 48 

1961 COSMETOLOGY CODE 

That the state Board has vitalized its administration of the Act 
is further evidenced by the fact that in the 1961 legislative session a 
bill supported by Board members was introduced and enacted into 
law, to become effective on July 1, 1961. 49 This law amends the ex- 
isting Code in two important respects — one legal and one practical. 
Legally, it seeks to strengthen the existing Act against possible 
charges of unconstitutionality. A practical result of the amendments 
is to empower the Board to hold hearings and set prices for every 
county and/or community in the state, strictly on its own initiative. 
Proposals to fix prices no longer have to originate with or be ap- 
proved by members of the trade, though that practice, as an alterna- 
tive procedure, is retained in the Code as amended. The Act pro- 
vides that: 50 

. . . The board shall, on its own initiative, investigate or cause to 
be investigated, conditions existing in the practice of cosmetology 
throughout the state, and shall establish new or modify existing 
minimum prices wherever and whenever it shall appear in the dis- 
cretion of the board that such action shall be in the best interests of 
public health and safety and in keeping with the purposes and ob- 
jectives of this act. 

Repealing the Board's old authority to approve a price agreement 
"with or without a hearing" 51 it expressly prohibits fixing any prices 



48 Operating shop expenses were detailed as follows: rent, taxes, advertising, 
utilities, depreciation, repairs, cleaning uniforms, laundry, office expense, 
dues and convention expense, miscellaneous (magazines, donations, book- 
keeping, frieght, etc.). An attempt is made to establish the profit or loss on 
each item of service, based on a cost accounting procedure. 

4i 'LAWS OF MONTANA 1981, Ch. 244, effective July 1, 1961. 

r '°Id., section 5, amending RCM 1947, section 66-806 (3). 

™Id., amending section 66-806 (1). 

88 



without a prior hearing,"' 2 with written notice "to every licensed 
practitioner in the areas affected, " 53 and also at least one publication 
thereof in an appropriate newspaper,"' 4 both "to be done not less 
than ten days prior to the hearing. ""•"• In the grant of independent 
state-wide power to fix prices and in the requirement of a formal 
public hearing, the new Code provisions are similar to those now 
contained in the Milk Control Act. 

The new law also makes a number of changes in the existing 
statute, calculated to professionalize further the beauty culture busi- 
ness. Educational and training standards and requirements are in- 
creased;™ beauty shops and schools no longer can be operated to- 
gether* 7 and schools must post a substantial bond; 58 apprentices no 
longer can work in a beauty shop — only licensed practitioners who 
have received a diploma in beauty culture from a beauty school,-™ 
which, as amended, now includes the course in cosmetology at 
Northern Montana College. 00 From December 31, 1961, a require- 
ment of one year's active practice in Montana prior to applying for 
a manager-operator license is added to the other requirements for 
that license. 01 

The Board's official name also is changed from that of "The Mon- 
tana State Examining Board of Beauty Culturists" to "The Mon- 
tana State Examining Board of Cosmetology," - although elsewhere 
in the Act the old name continues to be used. 63 

CONSTITUTIONALITY 

Having summarized these two Acts, we may now consider briefly 
the principal grounds on which their validity might be challenged. 
Price control acts generally' 14 are subject to attack on the following 



"'-Id., amending section 66-806 (3). 

"Id. 

"Id. 

m Id. 

'"'Id., section 3, amending RCM 1947, section 66-803. 

:r Id., amending section 66-803 (9). 

™Id., amending section 66-803 (8). 

™Id., amending section 66-803. 

m Id. 

M Id., section 1, amending section 66-801. 

fi -Jd., section 4, amending section 66-804. 

r ' :! See: Id., section 5, amending section 66-806. 

" :,a In all of the regulatory Acts vesting an authority to regulate prices in some 
other agency than the legislature, many of the grounds for questioning their 
constitutionality are common to all of them. I have chosen the Barber and 
the Beauty Culturist Acts as prototypes for discussing briefly and summar- 
izing these typical constitutional issues, partly because these Acts have been 
less fully drawn in detail than the others. 

"Some Acts have proposed to regulate other matters of importance, such as 
the permissible operating hours. These provisions raise much the same con- 

89 



principal constitutional grounds: 1. That they violate substantive 
due process; 2. That they do not provide for or require a procedure 
satisfying procedural due process; 3. In Montana and several other 
states they may be attacked on the specific ground that they violate 
a constitutional anti-trust provision prohibiting price or product 
monopoly; 4. That they try to delegate legislative price fixing pow- 
ers to private individuals, or to the trade, for self regulation; 5. That 
they fail to set forth the necessary standards and criteria on which 
to determine the "just" price to implement the policies of the 
statute — this form of defect is an additional reason for ruling the 
Act unconstitutional, even if the delegation is to a government 
agency. Of course, a given Act may be attacked on any combination 
of these grounds. 

Substantive Due Process 

It would seem that the principal question raised by an attack on 
these Acts for a want of substantive due process is whether the 
character of the trade and the conditions prevailing in it are such 
as to justify strict regulation in the name of the police power to pro- 
tect the public health. But for the most reliable indication of the 
probable ruling that the Montana Supreme Court would give to this 
question, we must look not to its rulings on Unfair Practices, Fair 
Trade, or even Milk Control, but rather to the several cases dis- 
cussed earlier in this study 65 involving statutes attempting to regu- 
late a variety of other fields, particularly photography, pharmacy, 
and plumbing. 

The questions raised by the present Act have a close affinity to 
those considered in these earlier Supreme Court decisions, which 
ruled unconstitutional two regulatory statutes and one city ordin- 
ance. In those cases, it will be recalled, the Supreme Court rejected 
the doctrine of extreme judicial restraint in passing on the consti- 
tutionality of police power and public welfare legislation regulating 
business under the due process clause. 00 Under this clause the 
United States Supreme Court has been developing a near-conclu- 
sive presumption of constitutionality, culminating in Justice Doug- 
las' candid statement in 1955 that, "The day is gone when this court 
uses the due process clause ... to strike down state laws regula- 
tory of business and industrial conditions," 07 adding that the polls 

stitutional questions as do those concerning price. For example, Revne v. 

Trade Commission, 113 U. 155, 192 P 2d 563, recently held the provisions 

regulating both of these matters in Utah's Barber's Price and Hour Act, 

U.C.A. 1953, sections 13-3-1 to 13-4-15, unconstitutional. 
""Pharmacy: Pike v. Porter, 126 M. 482, 253 P 2d 1055 (1953); State v. Stephens, 

102 M. 414, 59 P 2d 54 (1936). Photography: State v. Gleason, 128 M. 845, 

277 P 2d 530 (1954). Plumbing: City of Missoula v. Swanburg, 116 M. 232, 

149 P 2d 248 (1944). 

66 State v. Gleason, 128 M. 845, 277 P 2d 530, 531 (1954). 
" 7 Lee Optical Co. v. Williamson, 348 U. S. 483, 488 (1955). 

90 



were the place for the correction of these abuses, 08 if such they be. 
Judging from its last word, however, the Montana Court continues 
to reserve some independent discretion in passing judgment on 
whether the evil asserted can possibly be said to exist and whether 
the remedy proposed can possibly correct that evil, thus aligning 
itself with a considerable number of other state Courts which con- 
tinue to exercise this independent judgment. 09 

However, in the leading case asserting this reserved constitutional 
power of the Court, the Montana Court made it clear that on a 
"sufficient" showing that the legislature, acting as reasonably pru- 
dent men, considered the legislation involved necessary for the 
public welfare, our Court would be prepared to uphold that legis- 
lation. 70 It cited the then recent Nebhia case, which ruled constitu- 
tional New York's extensive Milk Control Act; 71 and, since then, it 
has assumed the constitutionality of Montana's Milk Control Act, 72 
seemingly approving this "standard of legislative reasonableness." 
The principal question, therefore, is whether the barber industry 
may reasonably be deemed to so affect public health, and whether 
maintenance of the pricing scale is so vital to the avoidance of a 
public health hazard as to require the kind and degree of regulation 
provided by the present Act. 

At the outset, it may be suggested that although the Montana 
Court struck down the statutes regulating the photographic trade 
and the particular regulations of the drug business which were 
challenged, as well as the city ordinance concerning plumbing, it 
still can rule constitutional the Barber Shop Code, including the 
price fixing provisions, consistent with the underlying rationale of 
those earlier cases. Although those cases do not make certain just 
how much independent judgment the Court would exercise in such 
cases in the future, it probably would give substantial effect to the 
general canon of constitutional construction which raises an initial 
presumption of the constitutionality of any piece of legislation. 
Moreover, this canon may well be given added weight in the public 
welfare field under the due process clause. 

In considering the Court's position on this Act, however, it is 
necessary to take into account the fact that a substantial majority 
of the state Courts passing on the constitutionality of Acts regu- 



**Id., quoting Munn v. Illinois, 94 U. S. 113, 134 (1876, for this). 
6 "Loc. cit., supra, n. 66. Cases from other states cited below will illustrate this 
statement. 

'"Associated Merchants of Montana v. Ormesher, 107 M. 530, 86 P 2d 1031, 
1034 (1939). 

n Nebbia v. New York, 291 U. S. 502 (1934). 

"State of Montana ex rel Montana Milk Control Board v. District Court, 5th 
Judicial District, —Mont.—, 355 P 2d 664 (1960). 



91 



lating barbering have held them unconstitutional. 73 Frequently, 
they seem to assume that decisions ruling economic regulation of 
the dry cleaning business, at least when extending to price control, 
are equally controlling for the barber business. 74 But this may be 
questioned. Though the general issues are the same for each type 
of regulation, as suggested above, it is submitted that the actual de- 
cision may be that such legislation is unreasonable in one field, such 
as dry cleaning, and reasonable in another, such as barbering. 
Surely, the danger of direct infection by communicable diseases is 
very much greater in a barber shop than in a cleaning establish- 
ment. The very process of cleaning is highly disinfectant, and the 
chance of transmitting contagious diseases in the handling follow- 
ing cleaning and bundling is negligible. There is authority stating, 
in effect, that where "personal service" is involved, the more direct 
its contact with the person receiving the benefit of it, the more 
likely it is to be subject to regulation in the name of the public 
health and welfare. 7 "' Dry cleaning would hardly qualify under this 
limitation. Furthermore, the rather elaborate requirements neces- 
sary, both for equipment and procedures, to assure sanitation in the 
barber shop, presumably would add substantially to overhead. Of 
course, here again, a generally satisfactory price schedule is no 
assurance of income for any particular shop; it still must compete 
in the quality of service and skills it has to sell. But even if a 
given price scale does not guarantee compliance with the extended 



"Note: Price Fixing Within the Barber Industry, 34 INDIANA LAW JOUR- 
NAL 621, 641-642 and N. 98 (1958-59). 

7l State Board of Dry Cleaners v. Thrift-D-Lux Cleaners, Inc., 40 Cal. 2d 436, 
254 P 2d 29 (1953) is a recent California case ruling price fixing in the dry 
cleaning business unconstitutional because of no sufficient relation to public 
health. In 1937, Ex parte Kazas, 22 Cal. App. 2d 161, 70 P 2d 962 (1937), 
had ruled a Bakersfield city ordinance fixing barber prices unconstitutional 
on the same basis. In State v. Gleason, op. cit., supra, n. 65, the Montana 
Supreme Court cited State v. Harris, 216 N. C. 746, 6 S. E. 2d 854 (1940), 
ruling a North Carolina statute regulating prices in the dry cleaning business 
unconstitutional for the same reasons. The Montana Court quoted extensively 
from that case, treating it as completely controlling in principle in Montana. 
Though involving the constitutionality of licensing statutes rather than price 
fixing for ordinary trades, both are relevant to the issues here considered. 
75 In re Kazas, 22 Cal. App. 2d 161, 70 P 2d 962 (1937), struck down a Bakers- 
field ordinance proposing to regulate prices in the local barber trade, as 
favoring a small class at the expense of the public. In State Board of Dry 
Cleaning v. Thrift-D-Lux Cleaners, 40 Cal. 2d 436, 254 P 2d 29, 33 (1953), 
the California Court considered the principles in that case at least equally 
readily applicable to the dry cleaning business, saying: 
On principle the standards here involved are indistinguishable from the 
standards considered in that case. Indeed it is argued that the circum- 
stances in that case presented an even greater reason for upholding the 
enactment; that it was . . . affecting an industry more personal in nature 
and therefore more subject to regulation. . . . (Emphasis added.) 
It concluded that if such regulation is bad in the barber business, it certainly 
must be in the dry cleaning business. 

92 



requirements of the statute and the Board, such compliance will 
not be possible without substantial income. 

These last considerations seem to have led the state Courts fre- 
quently to require proof of the relationship between a given price 
schedule and the public health, i.e., affirmative evidence that main- 
taining fixed prices is in fact an effective remedy for health haz- 
ards. 70 That is, instead of beginning with an initial presumption in 
favor of the legislation's constitutionality, these Courts are prone 
to put the burden of proving, as a fact, those assumptions on which 
the legislature originally acted upon the party relying on the va- 
lidity of the Act. Apparently, such proof has generally been quite 
difficult to demonstrate. 77 

Of course, those Courts which in effect raise a presumption of 
unconstitutionality, placing the burden of proof on the person seek- 
ing to sustain the legislation, do not support the suggestions made 
above that probably our Court "would give substantial effect to 
the very general canon of constitutional construction raising an in- 
itial presumption of constitutionality" and that "This canon may 
well be given added weight in the public welfare field, under the 
due process clause." 78 Those statements should be considered, there- 
fore, in the light of this cautionary note. 

Procedural Due Process 

Quite frequently it is assumed that statutes which empower any 
agency to fix prices in behalf of the public health and welfare, on 
condition of determining all facts relevant to what those prices 
should be to achieve the policies of the Act, require a public hearing 
with notice to all parties concerned to satisfy procedural due pro- 
cess. One study of the problem puts it thus: "Certainly it is quite 
proper, and even desirable, that administrative legislation be pre- 
ceded by a hearing at which persons affected by such legislation are 

76 Cases ruling Acts regulating both dry cleaning services and the barber busi- 
ness unconstitutional often are lumped together in support of this statement. 
See: Op. cit., supra, n. 73, at 642 n. 98. The author declares: 
Most state courts, however, inquire beyond the legislative findings of fact 
and into the actual relation between prices and public health. These courts 
require proof of this relation before sustaining the constitutionality of the 
statutes. Such inquiries have resulted in the invalidation of price fixing 
legislation because of the inadequacy of proof that stable and fixed prices 
directly promote sanitary shops. On the contrary, variations in ability, loca- 
tion, and operating expenses are the material factors which determine profit 
margins. . . . Thus the regulation or fixing of industry prices by legislative 
fiat is an arbitrary infringement upon freedom of contract which denies the 
individual due process of law. Id., 641, 642. 
Ace: Christian v. La Forge, 194 Ore. 450, 242 P 2d 797 (1952); Haigh v. State 
Board of Hairdressing, 76 R. I. 512, 72 A 2d 674 (1950); Cases cited supra, 
n. 74. Contra: Arnold v. Board of Barber Examiners, 45 N. M. 57, 109 P 2d 
779 (1941); Herrin v. Arnold, 183 Okla. 392, 82 P 2d 977 (1938). 
^Loc. cit., supra, n. 76. 
^Supra, at page 91. 

93 



given an opportunity to testify," 79 and cites a leading federal case 
strongly suggesting that not to do so would violate procedural due 
process. 80 Even if public hearings with full notice do not seem to be 
of such critical importance in setting barber and beauty shop prices 
as in setting milk prices, or even area operating costs, under the 
Unfair Practices Act, business prudence seems to dictate the adop- 
tion of this practice to assure the validity of the administrative 
ruling. And if procedural due process imposes these requirements, 
prior to the 1961 amendments of the Cosmetology Code discussed 
above, 81 both of the present Acts may have been vulnerable to at- 
tack on this ground, and the Barber Shop Act continues to be thus 
defective. 

Until the 1961 amendments, the Cosmetology Code expressly au- 
thorized the Board to approve without any hearing of any kind; 
and the Barber Code does not expressly require such hearing. So, of 
course, there is no provision requiring a giving of notice either to 
members of the trade or to the public. However, the recent amenda- 
tory Act cures these defects in the Cosmetology Code, expressly re- 
quiring both a public hearing and notice to all groups concerned, 
including the public. 82 Apparently recognizing the weakness of the 
Acts requirements in these particulars, and very possibly having 
been so counselled, the Cosmetology Board itself subjected its ex- 
amination of prices to these procedures before the statutory amend- 
ments. 83 Apparently, the Barber Board has not as yet taken similar 
action. Neither Act, however, provides for any kind of appeal for 
any interested person from a price order which might conceivably 
be used as a basis for challenge on procedural due process grounds. 

As stated above, these regulatory Acts may not be subject to Mon- 
tana's constitutional prohibition against agreements to limit pro- 
duction or to restrict prices on goods and commodities, because the 
personal services being sold are not a "good or a commodity." The 
recent United States Supreme Court case ruling that personal 
services are not exempt from the regulations of the Sherman 
Act under the provision expressly exempting labor, because more 
than mere "labor" is involved, does not justify a different con- 
clusion; 84 for while the Sherman Act expressly declares that "labor 



"'Annotation: Delegation of Legislative Power to Nongovernmental Agencies 

as Regards Prices, Wages, and Hours, 3 AMERICAN LAW REPORTS 

SECOND 188, 189, section 1. 
^'Western Union Telegraph Co. v. Industrial Commission, 24 F. Supp. 370 

(1938, DC Minn.) 
*'Op. cit., supra, n. 49. 
h2 Op. cit., supra, n. 50. 
si Board notices and procedures, described in notes 45 and 46, supra, establish 

this fact. 

8t United States v. National Association of Real Estate Boards, 339 U. S. 485 

(1950); United States v. American Medical Association, 110 F 2d 709 (D. C. 

94 



shall not be deemed a commodity under the Act," it also expressly 
extends to and prohibits generally monopolistic conduct tending to 
restrict "trade" as well. The Sherman Act is thus substantially 
broader than our constitutional prohibition. It was under this term 
that the United States Supreme Court ruled that attempts by the 
Washington, D. C, Real Estate Board to set fixed commissions on 
real estate sales violated the Sherman Act. 85 Moreover, even the 
anti-trust provision in the Constitution would be relevant only upon 
a showing that these Acts delegate legislative power to private 
bodies, which would give quite independent grounds for attacking 
them. 

Delegation to Private Groups 

Since the famous NIRA decisions, at least, there has been no 
question that a statute purporting to vest power in a group of pri- 
vate persons to regulate a trade or a business is unconstitutional. 8,i 
There is more question, however, on what will be considered such 
unconstitutional delegation. Members of a business may be directed 
to participate in framing such regulatory codes, including price. 87 
Where both a public agency and private persons participate in pre- 
paring such codes of regulation, but where the power to originate 
or to initiate the proposals resides solely in the private group, even 
though the public agency must approve or disapprove, it has been 
said that: 88 

Where the statutory scheme does not confine the participation of 
private groups or individuals to merely being heard, but empowers 
them to initiate or approve administrative legislation, (i.e., fix 
prices) ... a serious question arises as to whether such statute is 
not invalid as an improper delegation of legislative power. 

Such has been the character of both Montana statutes considered 
here. Considerable authority is available to support attack on this 
ground. 89 The Cosmetology Code is now corrected in this respect, 

Cir. 1940), cert, denied, 308 U. S. 599 (1940); Atlantic Cleaners & Dyers v. 
United States, 286 U. S. 427 (1932). 

""'United States v. National Association of Real Estate Boards, 339 U. S. 485 
(1950). 

w Schechter v. United States, 295 U. S. 495 (1935); Panama Refining Co. v. 
Ryan, 293 U. S. 388 (1935). 

h7 Obviously, such members may be called upon to provide information and 
data as a basis for establishing reasonable prices, but the question is, "Can 
they be given either exclusive or concurrent initiating or veto power?" 

* s Op. cit., supra, n. 79, at 190. 

8: 'Revne v. Trade Commission, 113 U. 155, 192 P 2d 563 (1948); La Forge v. 
Ellis, 175 Ore. 545, 154 P 2d 844 (1945). Although in Montana in the past 
neither Board has had the power to initiate price schedules, the Beauty Cul- 
turists' Board had the power to alter or modify a suggested schedule as it 
thought in the best public interest, while the Barber Board had no such 
power. This difference may be crucial. Arnold v. Board of Barber Exam- 
iners, 45 N. M. 57, 109 P 2d 779 (1941); and Herrin v. Arnold, 183 Okla. 392, 
82 P 2d 977 (1938) uphold the validity of the Montana Beauty Culturists Act 

95 



by the 1961 amendments, but the Barber Code is not. However, they 
both continue to be subject to attack because of the composition of 
their Boards. An administrative Board composed solely of mem- 
bers of the trade, as they both are, 90 and nominated by that trade 
itself, as the former is, 91 very possibly may be challenged as repre- 
senting the trade rather than the state or the public. A modern 
California case strongly supports such attack. 92 Professor Coad also 
challenges the Unfair Practices and Fair Trade Acts on this 
ground. 93 

Sufficiency of Statutory Guides for Price Fixing 

The constitutionality of these two Codes also may be questioned 
on the fifth ground given above, i.e., the sufficiency of the standards 
and criteria which they set forth to guide the price setting agencies. 
This question exists even though the Act may clearly have vested 
the price fixing power solely in a public agency. 94 The standards 
mentioned in these Acts are skimpy, to say the least. 95 As recently 
as 1953, the leading California case, just cited, ruled unconstitu- 
tional on this and other grounds a similar Code purporting to regu- 
late the dry cleaning business. 96 The developing practice of the 
Cosmetology Board, illustrated in its recent notice stressing the im- 
portance of making as thorough an investigation as possible to se- 
cure all facts on operating costs, certainly points in the right di- 
rection and will help to reinforce the scanty standards which are 
given. 



on this point. On the other hand, the cases cited above support the conclusion 
th,at Montana's Barber Act is invalid for this reason. 

^Cosmetology: RCM 1947, section 66-804, as amended; Barbers: Id., section 66- 
406. 

m Id., section 66-804: ". . . three members . . . appointed by the governor, from 
a list of six persons recommended by the Montana State Hairdressers' Asso- 
ciation." 

* a State Board of Dry Cleaners v. Thrift-D-Lux Cleaners, Inc., 40 Cal. 2d 436, 
254 P 2d 29, 36 (1953). 

^Coad, Are Montana's Price Fixing Statutes Valid?, XI MONTANA LAW 
REVIEW 21, 41 and 49. 

* 4 The basic theory is that price fixing is legislative in character; that the legis- 
lature cannot delegate to an administrative agency this essentially legislative 
function, it only can use such agency as a fact finding body, with power to 
apply to those facts the standards set by the legislature, expressing the policy 
by which prices are to be measured. Both Schechter and Ryan, op. cit., supra, 
n. 86 recognize these limitations. The want of such standards also was one 
of the principal defects in California's Dry Cleaning Act, as construed by 
State Board of Dry Cleaners v. Thrift-D-Lux Cleaners, Inc., 40 Cal. 2d 436, 
254 P 2d 29, 36 (1953). Annotation: Delegation of Legislative Power, etc., 
Section 3, 3 AMERICAN LAW REPORTS SECOND 188, 192. 
a7 'Supra, at nn. 36, 37, 38. 

™Op. cit., supra, n. 92, at page 36. See also, Necessity of Adequate Standards 
as a Prerequisite of a Valid Delegation of Legislative Authority, 42 AMER- 
ICAN JURIST 345, Public Administrative Law, section 45. 

96 



DISQUALIFYING PENALTIES 

Even if the Montana Court should uphold the constitutionality of 
the Barber Act's basic purpose, which is providing fixed price 
schedules in the name of the public health, it does not necessarily 
follow that all of the restrictions and disqualifying provisions con- 
tained in the Act must be or should be upheld. The above summary 
of the Act's provisions makes it clear that its regulations go beyond 
what is warranted in the name of public health. According to the 
criteria adopted in the beginning of our study, the legality of these 
provisions should be reviewed. 

Under this Act, a barber may be deprived of the means of his 
livelihood for the following reasons, which have nothing whatever 
to do with public health: 1. Conviction of a felony; 2. Gross mal- 
practice; 3. False or deceptive advertising; 4. Advertising under 
some other trade name than his own; 5. Habitual drunkenness or 
narcotic addiction. Here personal morals are being regulated and 
punished in the name of the needs of public health. Fraud, crime 
at some time in the past, even though the debt to society supposedly 
has been paid in full, intemperance — all are irrelevant to the issue 
of health and sanitation. These arbitrary restrictions call to mind 
the argument that the photographic business needed restrictive 
regulation because it sometimes tried to defraud the public, to 
which the Montana Supreme Court replied, in substance, that the 
same is true in every other business, that there are statutes dealing 
specifically with such conduct wherever found, and that those stat- 
utes are adequate for the purpose. 97 The same reasoning would re- 
quire the Montana Court to strike down every one of these stated 
grounds for cancelling a barber's license. The natural competitive 
processes, determined by the kind of services that the barber gives 
his customer, will provide sufficient penalties of an automatic kind, 
thus preserving as much of the genuine free market as is consistent 
with the needs of public health . 

The provision authorizing revocation of a barber's license for 
the commission of a felony deserves special criticism. The gross 
insensitiveness to the threats that such provisions as this make to 
our cherished democratic traditions and institutions is cause for 
grave concern. It strongly suggests that Western democracy is quite 
as likely to destroy itself as it is to be destroyed from outside. More 
seriously yet, this is not an isolated instance of legislation doing 
violence to institutions sheltering the individual personality from 

"'Supra, at page 15. Op. cit., supra, n. 92, at page 31, also contains an excellent 
analysis of other California legislation which deals in great detail with pro- 
visions giving extensive and adequate provisions for the health and safety 
of everyone concerned in the dry cleaning business, concluding that this 
therefore cannot be the basis for the exercise of police power in the price 
fixing code. 

97 



vindictive excesses; it is part of an all too common legislative pat- 
tern. For example, a random and incomplete selection reveals that 
the members of the following ten businesses, trades, or professions 
may be completely deprived of their rights to practice their calling 
simply and solely because, at some time in the past, they have been 
convicted of a felony, or of "acts involving moral turpitude," or "of 
a crime or gross immorality." These include: 1. Photography — 
"crime involving moral turpitude;" 98 2. Pharmacy — "convicted of a 
felony;" 99 3. Barbering — "conviction of a felony;" 100 4. Cosmetology 
— "must be of good moral character" to qualify for license; 101 5. 
Nursing — "guilty of a crime or gross immorality;" 102 6. Public ac- 
countants — "unprofessional conduct, or other sufficient cause;" 10 * 
7. Optometry — "gross immorality" or "conviction of crime;" 104 8. 
Retail food store — "for a felony" (does not expressly even require 
conviction); 101 9. Physio-therapy (1961 Act) — for conduct which, in 
the Board's judgment, is immoral, or "for conviction of any crime 
involving moral turpitude;" 100 10. Dentistry — "conviction of a felony 
or misdemeanor involving moral turpitude." 107 

There are at least four serious objections to the abominable prac- 
tice illustrated by this legislative pattern. These are: 1. The effect 
of such outrageous provisions on the individual; 2. The violence it 
does to certain fundamental principles of society in dealing with 
"wayward members;" 3. The barriers it throws up to the implemen- 
tation of a fundamental major premise and policy — the rehabilita- 
tion of those who have so fallen from "grace" as to be branded 
criminals; 4. The serious constitutional issues it raises. 
In his fine psychological study of the concept of justice entitled, 
"The Sense of Injustice," Professor Edmond Cahn gives us a marvel- 
ous portrayal of the effect such treatment has on any person so 
situated: 108 

Like the Ten Commandments, the law formulates its list of offenses, 
charges an accused on one or more counts of particular guilt, and 
makes its adjudication accordingly. But what if its own administra- 
tion should instill the general guilt with which it professes to be 
concerned? 

. . . Suppose a bank teller is convicted of embezzlement; i.e., a guilt 



"TICM 1947, section 66-1710. 

"''Id., section 66-1504 (7). 

lw Id., section 66-403 (H). 

J "7d., section 66-803. 

WJ Id., section 66-1240 (2). 

lo:i Id., section 66-1807. 

v,l Id., section 66-1312. 

10S Id., section 27-311. 

1,J6 LAWS OF MONTANA 1961, Ch. 39, section 9 (3) (4). 

a07 RCM 1947, section 66-911 (1). 

lu *Edmond N. Cahn, THE SENSE OF INJUSTICE 153-154 (1949), 

98 



particular as to kind, date, and circumstances of temptation. If after 
his term of imprisonment his society rejects him as a branded felon, 
he approaches a state of general guilt, an imputation of pervasive 
viciousness. Thus cast out he will probably conduct himself as one 
conscious of general guilt might be expected to. He will develop an 
obsessive fear of police and courts and a hatred of the social order 
which so smugly despises him. He feels sure that if arrested again 
he will be found guilty, whatever the nature of the charge. He re- 
gards himself as infected and corrupt. 

... In a (certain) primitive culture . . . which, according to anthro- 
pologists, lacks the usual forms of legality, every man's hand is raised 
in malediction or violence against every other man . . . and in time 
of stress the twentieth-century despotic police state exemplifies what 
it means to live under a legal imputation of general guilt. The two 
conditions are strikingly similar. Each possesses an extra-ordinary 
capacity to corrode and sever spontaneous social bonds, to turn 
friends into enemies and confidants into informers. 
Secondly, on the social side of the coin, this practice violates 
several fundamental principles of a civilized society. The progres- 
sive and cumulative denial of the rights and privileges which every 
citizen ordinarily is entitled to exercise by exacting "penalties" for 
the commission of crime beyond those specifically provided for 
by the criminal law is suspect at best. Such penalties become in- 
tolerable in any case where the demands of proper regulation do 
not actually require them. In the first place, a basic character- 
istic of our Western culture is found in the principle of expiation. 
Again, Cahn states that principle superbly: 10 " 

There is another attribute of mature law that may lighten the load 
of the guilty. This is the principle of expiability. Most modern legal 
systems regard all offenses as expiable — at a price. . . . Once the 
price has been paid, civilized law is generally satisfied and will afford 
no support to subsequent social persecution of the offender or his 
family. Granted that the penalty imposed on a recidivist may be 
increased in the light of his prior convictions, the new penalty re- 
mains nevertheless the price of his new crime. . . . But on com- 
pletion of each payment, the charge will be eradicated for juridical 
purposes at least. By this means, the legal system affords a procedure 
of expiation and a more or less adequate opportunity for fresh begin- 
nings. The practice of specified penances in institutionalized religion 
is a tribute to the same principle, for hardly anyone really believes 
in an absolution without a penance. 
Summarized, that principle requires that once even a felon has 
paid the price, i.e., his debt to society, generally he should be ac- 
cepted back in society, not treated permanently as an outcast — 
permanent outlawry from the clan supposedly was itself outlawed 
centuries ago. 

The third objection is closely related to, and really a part of, 
the principle of expiability. This is the principle of rehabilitation 
of criminals, to which all civilized societies are firmly committed. 
Every added field of human endeavor which may be denied to such 
person raises the barriers to rehabilitation that much higher, and 
finally they become nearly insuperable. Note that practically every 
one of the areas studied here contains a disqualifying limitation of 
v "'Id., 158. 

99 



this kind. In the aggregate, a felon or one guilty of a crime in- 
volving "moral turpitude" (whatever that means) or "for . . . 
sufficient cause" (dictated by the judgment or the whim of the 
regulatory agency) is excluded or excludable from photography, 
pharmacy, barbering, the beautician trade, public accounting, 
nursing, optometry, food retailing, physio-therapy, and dentistry 
— surely an intolerably large number of exclusions, and this is 
only a partial listing. 

These provisions are so extreme that they appear irrational. A 
comparison of the codes for these professions with those regulating 
such professions as medicine, law, and teaching suggests no ade- 
quate explanation for the extensive itemizing of conduct carrying 
social stigma as grounds for the revocation of business, trade, or 
professional licenses. Crime as such is not even listed as a ground 
for revoking a license to practice medicine, it being listed for that 
profession rather in terms of "unprofessional, dishonorable, or 
immoral conduct. 110 

True, conviction of a felony or misdemeanor involving moral 
turpitude by an attorney requires disbarment; 111 and similarly, the 
State Board of Education is directed to revoke a teacher's certifi- 
cate for immorality or any "crime against the state law" 112 (which 
is much too broad). But arguably, the very nature and scope of 
the responsibilities of these latter professions make criminal con- 
duct highly relevant in determining the qualifications of their 
practitioners, as it is not in many other professions and occupations. 
If this ground has been copied from the statutes regulating legal 
practice and extended to other occupations generally, it is most 
unfortunate. There is a cruel non-sequitur in the assumption that 
because conviction of a crime may be a relevant and permissible 
ground for revocation of licenses in one profession, it is equally 
permissable in all occupations. Such revocation is an evil at best, 
even if a necessary one. At worst, as now expanded, it becomes in- 
defensible and intolerable. 

Even more important, however, is the fact that there is not the 
slightest precedent in the Codes regulating the older professions 
for the great enlargement of the causes for revoking occupational 
licenses of all kinds simply because such conduct may be disap- 
proved of on social or on moral grounds. 

Why, then, this broadening to include conduct irrelevant to the 
occupations being licensed? If not a complete explanation, the 
following may be suggestive. This kind of provision is found most 
frequently in licensing statutes which have been supported prim- 



:, "RCM 1947, section 66-1004 (3). 
llr RCM 1947, section 93-2026 (1). 
"-7d., section 75-2506. 



100 



arily by those wanting to regulate and limit the number of po- 
tential competitors in the field — to restrict entry competition. 
Such disqualifying provisions are not a permissible means of so re- 
stricting competition. Moreover, if the retributive or vindictive 
spirit is being expressed here, those attitudes are grossly misplaced 
in such provisions. Granted that the principle of retribution has a 
place in modern theories of penalogy it must be disciplined, in- 
formed, channelled, and limited in scope, all of which require- 
ments are wanting in such legislation. Furthermore, bad as these 
provisions are when uniformly administered, they are almost cer- 
tain to be used only occasionally, for spite and personal vindictive- 
ness; thus they compound the "sense of injustice," increasing re- 
sentment and fear and the sense of frustration. They put a ter- 
rific strain on the very structure of our society. And, even if it 
be true that few have been thus disqualified in practice, the very 
fact that the law countenances such an outrage inflames the "sense 
of injustice." 

Constitutionality 

Since those conditions in society which trigger and stimulate 
the sense of injustice nurture directly both the layman's and the 
judge's ideas of due process, it is no wonder that there are grave 
constitutional issues raised by these penalty provisions. 

Perhaps the most ominous thing about this type of legislation is 
the arbitrariness, the callousness, and the indifference to social 
consequences which it reveals in the legislature. The seriousness 
of the harm inherent in it takes on a new dimension in its cum- 
ulative impact — the group of legislative acts considered do not 
merely exclude individuals from a particular profession; they 
approach dangerously near to denying to many persons all right 
to carrying on a livelihood. And any Court disposed to recognize 
and base its decision on that fact can cast its rule of unconstitution- 
ality equally readily in any one or more of the following three 
doctrines: due process; 11 ^ equal protection; 114 bill of attainder. 11 "' 

" :i De Veau v. Braisted, 363 U. S. 144, 157 (1960) states: "Appellant's argument 
that section 8 ... is contrary to the Due Process Clause . . . depends, as it 
must, upon the proposition that barring convicted felons from waterfront 
union office, ... is not, in the context of the particular circumstances which 
gave rise to the legislation, a reasonable means for achieving a legitimate 
state aim. . . ." Here, the majority of the Court found a "legitimate state 
aim," but, almost certainly, Only a few of the acts here considered would 
meet that test. 

" 4 Torao Takahashi v. Fish and Game Commission, 334 U. S. 410 (1947). Here, 
the Court ruled unconstitutional a California statute barring all Japanese 
ineligible to citizenship to fishing rights in coastal waters. It stated the 
question, answered in the negative, thus: "Can California, . . . (bar) Taka- 
hashi from earning his living as a commercial fisherman in the ocean waters 
off the coast(?)" In a large number of very recent cases in this general field 
a prime issue has been equal protection. 
""'Probably the most common definition of a bill of attainder is that it is & 

101 



Although the justices in two very recent United States Supreme 
Court cases 110 differed on the scope of the prohibition against bills 
of attainder, or pains and penalties, they were in complete agree- 
ment that for penalties of this kind imposed generally by the legis- 
lature to be permissible, they must be relevent to the proper and 
effective regulation of the business or trade involved. Much the 
same standards determine whether they will violate due process. 

No doubt some readers of this study immediately will charge 
the writer with approving sin. Nothing could be further from the 
truth. But these regulations are necessary evils at best; hence, 
they must be limited strictly to matters that are relevant to the 
principal evil. If, for example, a barber persists in practicing his 
trade knowing he has a seriously contagious disease, his license 
may reasonably be cancelled or suspended. Similarly, any crim- 
inal or other conduct affecting the quality of the services to the 
public he is licensed to perform may justify cancellation of his 
license — as is neatly illustrated by the Real Estate Dealers' Code 
which so provides for fraudulent representations and practices, 117 
as well as by the codes for the legal and teaching professions. 118 



"legislative act which inflicts punishment without a judicial trial." Flem- 
ing v. Nestor, 363 U. S. 603, 613, 629 (1960); Cummings v. Missouri, 4 Wall. 
277, 323 (1867). If it be suggested that a law excluding one from a trade for 
conviction of a felony does not quite fit this definition, because here the 
disqualification is the direct result of a trial and conviction, other definitions 
are available, such as: "The constitutional prohibition against ... a bill of 
attainder has been described as 'a general provision against arbitrary and 
tyrannical legislation (denying individuals) of existing rights, whether of 
person or property.'" Ogden v. Saunders, 12 Wheat. 213, 6 Led 606 (1827). 
Indeed, the leading case upholding the constitutionality of a New York statute 
requiring the revocation of a physician's license to practice upon conviction 
of a felony assumed that barring from any calling for the commission of a 
felony raised a substantial issue under this constitutional prohibition. Haw- 
ker v. State of New York, 170 U. S. 189 (1897). The exclusion was upheld 
only on the ground that criminal conduct was relevant to determining qualifi- 
cations for this particular profession. 

""Fleming v. Nestor, 363 U. S. 603 (1960). Here, the majority cites two leading 
United States Supreme Court cases decided in 1867 and rules unconstitutional 
a Missouri constitutional provision barring from many professions and call- 
ings any person who had ever manifested any sympathy or support for the 
Confederacy. In Cummings v. Missouri, 4 Wall. 277 (1867), it was a minister 
who successfully charged a bill of attainder; in Ex parte Garland, 4 Wall. 333 
(1867), it was a lawyer who was successful. In Fleming v. Nestor, both the 
majority and the dissents apparently approved the following quotation (ibid. 
at 614) from the Cummings case: 
The oath could not . . . have been required as a means of ascertaining 
whether parties were qualified or not for their respective callings. ... It 
was exacted, not from any notion that the several acts designated (i.e., 
sympathy and support) indicated unfitness for the callings, . . . Ibid., at 
320. (Emphasis added.) 
So, in Cummings and Garland, the Court found the provision so barring a 
bill of attainder, even for the clergy and the law. 

J ' 7 RCM 1947, section 66-1915, where the grounds stated for suspension or revo- 
cation are all some form of fraudulent misrepresentation or dishonest dealing. 
:i Tf this all too frequent practice of permitting the exclusion from a trade or 

102 



1963 ADDENDUM 

The case referred to above, on page 86, in which the Board re- 
voked a practicing barber's license for having violated the price 
schedule set, has finally been disposed of, but without resolving 
any of the basic legal questions. In that case the defendant ap- 
pealed to the Montana Supreme Court, but after going to consid- 
erable trouble in preparing his appeal, he asked the Court to dismiss 
it; the Court granted his motion; he reapplied for a barber's license; 
the Board granted it, and the barber is now practicing his trade in 
another shop. 

Perhaps the ultimate absurdity found in statutes permitting a 
Board to disqualify a convicted felon in his trade is found in the 
statute regulating the practice of artificial insemination, enacted 
in 1953. ni> It reads thus: 

Revocation or suspension of licenses. The livestock sanitary board 
may either refuse to issue or refuse to renew or suspend or revoke 
any license upon any of the following grounds: 

(c) The conviction of a felony . . . 

(e) Immoral, unprofessional, or dishonorable conduct manifestly 

disqualifying the licensee from practicing artificial insemination. 



calling of convicted felons is nurtured by the impulse to prohibit entry or to 
lessen competition, the problems posed by the practice is doubly relevant to 
our present study. 

J,9 RCM 1947, section 46-2510 (c) and (e), as amended by LAWS OF MON- 
TANA 1953, Ch. 37, section 10. 

103 



Chapter VII 
The Milk Control Act 

INTRODUCTION 

Of the fifth and last principal area of concern in this study, 
regulation of the milk industry, legal counsel for the Montana Milk 
Control Board recently 1 uttered this masterpiece of understate- 
ment: 

Milk control is such a complex and little known subject that the court 
before which an appeal is filed does not fully understand the extent 
of the industry, nor the interests of the people involved. By the time 
the court is acquainted with the nature of the administration of milk 
control, months have passed, during which producers have not been 
paid according to the proposed new schedule. 

And he might have added, "And during which the underlying eco- 
nomic facts may have changed." Obviously it is not possible here 
to consider in detail all the ramifications of the Milk Control Act's 
administration. Hence, this examination will be so shaped as to 
make as clear as possible the profound effect that price control has 
had on traditional economic processes and market practices in the 
dairy industry. This will best serve the purposes of our present 
study. 

Regulation in this industry differs in its effects fundamentally — 
even crucially — from regulation in the other industries examined. 
In spite of the restrictions imposed by the regulating agencies or 
permitted by law in the four other areas discussed, they have 
retained more or less the elements of the free market. They leave 
some room for arguing as to how substantially and seriously regu- 
lation has impinged on freedom of competition and, under the Un- 
fair Practices Act and the Fair Trade Act, traditional market char- 
acteristics have shown a strong tendency to reassert themselves 
in these areas in recent years. Such is not the case for the milk 
industry. 

ECONOMIC CONSEQUENCES OF REGULATION 

The production and distribution of milk products have been ir- 
revocably lost to the free market. As an extended price hearing 



'Jeff Brazier, Legal Problems in the Operation of State and Federal Control 
Programs, PROCEEDINGS, 25TH ANNUAL DAIRY INDUSTRY WEEK, 
MONTANA STATE COLLEGE— PART II, MILK PRICING, 100 (1960). 

104 



in Missoula recently demonstrated, the various segments of that 
industry accept without question the new (and alien) economic 
system created for them by the comprehensive provisions of the 
Act, which authorizes the complete control of the entire industry, 
from producer through distributor to consumer. This includes par- 
ticularly a rigid system of administered prices which, in fact, is 
the prime function of the Milk Control Board, since the industry 
continues to be subject to other agencies, particularly the Montana 
Livestock Sanitary Board, which regulates and licenses to assure 
product purity and general healthfulness. And, even when such 
ideas as freedom of contract are voiced, it is likely to be with 
respect to new relationships, such as the relative interests of the 
producer and the distributor in new property interests such as the 
"milk base," which is altogether foreign to traditional conceptions 
either of property or of the free market. Indeed, in the new rela- 
tionships molded by this process of rigid controls, in the producers' 
alleged attachment to and nearly complete dependence on the dis- 
tributor, some think that they see emerging an economic pattern 
strikingly similar in many ways to the old feudal tenure relation- 
ship. This statement will be illustrated and more fully explained 
later. 

Since the Milk Control Act intends to provide for a tightly inte- 
grated control of the entire industry, from the large number of 
small producers through the processor-distributor and the retailer 
to the ultimate consumer, its administration is much more complex 
than that of the other Acts studied so far. Both the size and type 
of businesses it regulates vary greatly. Even though, in the last 
fifteen years particularly, there have been marked trends toward 
oligopoly in the processing and distributing of milk products, the 
small business operator still is the dominant type in the total 
process. 2 The present study therefore has a two-fold interest in the 
milk industry: observing the impact of regulation on its small 
operators and noting the modification of the basic relationships 
caused by such complete market control. 

EARLIEST REGULATION 

Milk production has been regulated and licensed for purity since 
191 1. 3 More surprisingly, in this same year it was made a mis- 
demeanor, carrying substantial penalties, to discriminate between 
different sections or localities in the state in the prices paid for 
milk, cream, or butterfat, with the intention to create a monopoly. 4 

"Compare the milk and the gas "industries." In the former, the relatively 
small operating unit is found at the production or manufacturing end; in the 
latter, it is the "lessee" of the filling station, operating at the retail end of 
the distribution process, who is the typical "small businessman." 

S LAWS OF MONTANA 1911, Ch. 138, 1 RCM 1921, Political Code, Ch. 202. 

'Ibid., section 17, RCM 1921, section 2630. 

105 



The first price control act was passed in 1935. 5 However, the present 
Act was enacted in 1939 6 and extensively revised in 1959. 7 The 
1939 Act first will be summarized and then the fundamental 
changes made in it in 1959 will be noted, in order to make clear 
the shift in underlying philosophy implicit in the revision. 

1939 ACT 

Modelled in part, no doubt, on New York's Milk Control Act, 
which was held constitutional by the United States Supreme Court 
in the Nebbia case, 8 Montana's Act is prefaced with a very elaborate 
declaration of policy reminiscent of language in the federal Act, 9 
stating substantially that: 10 1. Milk is a necessary article of food, 
vital to public health and welfare; 2. Unfair, unjust, destructive 
and demoralizing trade practices have dominated the milk market, 
resulting in a constant menace to public health and welfare; 3. The 
ordinary laws of supply and demand are inapplicable because of 
the peculiar nature of milk as a highly perishable product and of 
the consumers' needs, which are such as to make it necessary to 
maintain a production schedule, this frequently resulting in a sur- 
plus of fluid milk which must be converted into by-products, often at 
a substantial loss; 4. Unless the producer, processor, distributor and 
retailer are guaranteed a reasonable profit on milk, both its supply 
and quality are adversely affected, with great harm to the citizens 
of the state; 5. Because it is so vital to the public health and wel- 
fare, it is necessary to invoke the state's police powers to assure 
the necessary quantity and quality of milk, in the public interest; 
thus state supervision and regulation of the fluid milk industry is 
required. The stated purpose of the Act "is to protect and promote 
public welfare and to eliminate unfair and demoralizing trade 
practices . . . enacted in the exercise of the police powers of the 
state." 11 

From this bare policy statement and declaration of purpose, it 



5 LAWS OF MONTANA 1935, Ch. 189. 

"LAWS OF MONTANA 1939, Ch. 204. 

7 LAWS OF MONTANA 1959, Ch. 192. 

8 Nebbia v. New York, 291 U. S. 502, 516-518 (1934). Ibid., 518 n. 2 gives the 
legislative history of New York's milk control law, originating in LAWS OF 
1933, Ch. 158. Section one recited the economic conditions requiring legisla- 
tion and detailed the legislative policy therefor. Becoming section 300 in 
Agriculture and Markets Law, in NEW YORK'S CONSOLIDATED LAWS, it 
is clear that our policy declaration in RCM 1947, section 27-401, is a close 
paraphrasing of that section. Condensed substantially by later revisions, this 
statement now appears in McKINNEY'S CONSOLIDATED LAWS OF N. Y., 
section 258-k (1953). 
U.S.C.A. (1952), section 608c (18). 

: "RCM 1947, section 27-401 — Declaration of Policy Relating to Milk. The 1939 
Act is codified in RCM 1947, section 27-401 through 27-425. 

"Ibid., section 27-402. 

106 



becomes obvious at the outset that the public interest in compe- 
tition and in the maintaining of a free market in the traditional 
sense is completely abandoned in the milk industry under this Code; 
and in its place there emerges the policy premise that the commodity 
itself is so essential to nutrition and thus to the health and welfare 
of the public that maintaining both its quality and quantity, at 
whatever cost, becomes the primary and critical governmental 
concern. And only slightly less obvious is the further assumption 
that the stabilizing of the market, price-wise, and the practical 
elimination of competition are essential means for assuring that 
quantity and quality. Although it now is supposedly the public 
health which provides the prime interest in this industry, the regu- 
latory body which the Act sets up and the administrative powers 
and procedures it authorizes not only naturally, but inescapably, 
impel that Board to focus its attention on the industry itself and 
to treat its economic health and well being as its chief, if not sole, 
concern. Not only the preamble but practically every additional 
provision in the Code centers its attention on the industry and the 
well being of all its parts — its members — all in the name of the 
health and safety of its customers, the public. 

Milk Control Board 

The Act creates a five member Board 12 composed of the Livestock 
Sanitary Board's executive officer, serving ex officio as chairman, 
and four other members appointed by the governor: 1. A consumer; 
2. A producer; 3. A producer-distributor; 4. A distributor. As thus 
composed, the Board is heavily industry-centered. This Board is 
"vested with the powers, and it shall be its duty to supervise, 
regulate and control the fluid milk industry in . . . Montana, in- 
cluding [its] production, transportation, processing, storage, dis- 
tribution, and sale ... in Montana, for consumption within the 
state." 13 To this end, the Board also is vested with plenary powers 
to take all legal procedures necessary to ascertain all facts required 
to administer the Act, including particularly the holding of public 
hearings; the subpoenaing of persons and records; the administering 
of oaths; the taking of depositions; 14 the entry, inspection, and inves- 
tigation of all milk plants; and the examination of all records, 
books, papers, or documents 15 relative to milk transactions of all 
kinds, providing, however, that information thus gained shall be 
confidential. 1 " In addition, it is empowered to require regular re- 
ports of production, distribution, and purchase and sale of milk 

12 Id., section 27-404. 
1!! Id., section 27-405 (1). 
u Id., section 27-405 (2). 
ir ld., section 27-415. 
w Id. 

107 



by all licensed dealers. 17 The Board also may employ necessary 
assistants and agents 18 and it is its duty to hire an executive secre- 
tary 19 (its administrative and financial officer) serving under the 
direction and at the pleasure of the Board. 20 

Among the Board's prime powers are those providing for the 
designation of marketing areas, according to natural conditions, 21 
subject to the approval of a majority of the dealers therein, and the 
establishing of a fixed price schedule for each area, following a 
public hearing in that area. 22 The Act preserves the rights of both 
consumers and industry to testify, 23 to determine the "reasonable 
costs" of producing, hauling, handling, processing and/or other 
services, taking into consideration also, however, what prices in 
the several markets "will best protect the milk industry . . . and 
insure a sufficient quantity of pure and wholesome milk, . . . and 
be most in the public interest." 24 Moreover, "the Board shall take 
into consideration the balance between production and consumption 
of milk, the costs of production and distribution, and the purchasing 
power of the public." 27 ' These factors are to be considered on the 
basis of "the costs of ordinarily efficient and economical milk 
dealers, including a reasonable return on necessary investment." 

Interestingly, also, the Board is authorized "to act as 'mediator 
or arbitrator' to settle any controversy or issue pertaining to fluid 
milk among or between" industry members. 20 Recognition of the 
possible utility of "arbitration" in the milk industry deserves fur- 
ther comment below. 

In addition to the all-inclusive powers vested in the Board sup- 
porting its administration of the Act itself, it also is given specific 
and important powers "to formulate . . . reasonable rules and regu- 
lations governing fair trade practices as they pertain to the trans- 
action of business among licensees," 27 applicable to the sale of milk, 
in any case. With the 1959 amendment of this section, this power 
becomes much more critical yet in the current price control of the 
milk industry. 

In each market area, the Board also is responsible for promoting 
an association designated as "the dairymen's association, of such 



"Id., 


section 27-416. 


18 Id., 


section 27-404. 


19 Id. 




""Id. 




21 Id., 


section 27-406 (b). 


w Id., 


section 27-407. 


,si Id. 




Ji Id. 




% 'Id. 




"Id., 


section 27-405 (5). 


27 IcL 


section 27-414. 



108 



market," composed of all the Board's licensees therein, 28 and is 
supposed to make regulations for the operation of these associa- 
tions, as instrumentalities of the Board, for the purpose of gathering 
all information necessary for a cost analysis, and of counseling the 
Board generally, "as opportunity may afford, in carrying out and 
enforcing the provisions of this Act." 1 ' 9 To assist in performing 
these services as such instrumentality, the Board may pay a sum 
not to exceed ten percent of the license fees from each market to 
its "association." 80 

Miscellaneous Provisions 

Furthermore, the 1939 Act encouraged the use of marketing co- 
operative corporations in the milk industry, by especially providing 
that such a corporation should be entitled to "blend" the "net pro- 
ceeds of all its sales in various classes, . . . paying its producers 
such blended price." 81 The marketing contracts between such cor- 
porations and their members likewise are confirmed under the Act. 8 - 

Still another significant provision imposes on the Board the duty 
to cooperate fully with agencies from other states, and with the 
United States Department of Agriculture, including the power to 
participate in joint hearings and to "issue joint or concurrent 
orders" in the exercise of its powers under this Act. 83 As we shall 
see shortly, however, the practical importance of this section belies 
appearances, because of conditions in the federal law which the 
Board cannot meet under the Montana Act. 

Since the Act's administration must be financed from licenses 
issued and fines imposed under it, 84 considerable attention is paid 
to the licensing procedure. All dealers (which include producers, 
producer-distributors, and distributors) must be licensed by both 
the Montana Livestock Sanitary Board and the Milk Control 
Board. 85 The license fee is based on the volume of milk produced 
or handled. 80 The Board may refuse to grant a license or it may 
suspend or revoke existing licenses "for cause," following notice 
and a hearing. 87 Violations of the Act or of Board rules are expressly 
recognized as cause for such refusal. 88 Penalties for the late pay- 



^Id., section 27-418. 

a 7d. 

"'Id. 

3] Id., section 27-419. 

" J Id. 

s »Id., section 27-421. 

M Id., section 27-417. 

*Id., section 27-410. 

30 7d., section 27-409. 

S1 ld., sections 27-408, 27-411. 

SH Id., section 27-411. 



109 



ment of license fees also may be imposed/"'' The 1939 Act does not 
provide for an appeal from any such Board action. Violations under 
the Act also are made misdeameanors. carrying a fine not to exceed 
S600. though each day's violation is a separate offense. 4 " 

One of the interesting things about the 1939 Act is that although 
it states that the Board may institute any form of action in the 
Courts necessary to enforce compliance, even relaxing limiting 
conditions ordinarily controlling the securing of equitable relief, it 
says nothing about formal action against the Board. This omission 
is dealt with extensively in the 1959 amendments, however. 41 

1959 AMENDMENTS 

The 1959 amendments, amounting almost to a revision, are sub- 
stantial and rather wide ranging. They completely reverse the 
rationale on which Board membership is based. Whereas the origi- 
nal Act required that four of its five members be selected from the 
livestock and milk industries the present law prohibits the appoint- 
ment of any person with such connections to the Board. All five 
members must be appointed from the consumer class of the public 
and no member can have held any public office for two years pre- 
ceding his appointment, nor during his term. 4 - Not more than three 
members may be from a single political party or reside in a par- 
ticular congressional district. 48 

Board Powers Expanded 

Although their generally stated powers continue substantially 
the same, the Board's explicit particular powers and certain duties 
and responsibilities are substantially broadened by the amend- 
ments. For example, whereas under the original Act the Board 
was authorized to establish new marketing areas only after it had 
determined that a majority of all dealers licensed by the Montana 
Livestock Sanitary Board favored such market. 44 under the present 
Act it is vested with both the authority and the duty "to designate 
natural marketing areas'' covering the entire state and to set mini- 
mum prices throughout the industry, for each area, with not less 
than five areas so designated. 4 " The power to adjust or alter such 
area boundaries from time to time also is included. 41 '' 



*'Id., section 27-412. 
'Id., section 27-422. 
;: LAWS OF MONTANA 1959. Ch. 192. section 12: RCM 1947. section 27-428 

I as amended) , 
"LAWS OF MONTANA 1959. Ch. 192. section 2. amending RCM 1947. section 

27-404. 

L Ibid. 

44 RCM 1947.. section 27-406 (b). 

-LAWS OF MONTANA 1959. Ch. 192. section 6. amending RCM 1947. section 

27-406. 
"Id., section 27-406 (b). 

110 



The Act as amended also enjoins the Board to determine the 
"actual dollars and cents costs of production and distribution" by 
every means available, 47 including particularly preliminary field 
investigations made by its accountants. 48 Apparently partly to this 
end, the Act also requires all distributors and producer-distributors 
to keep very detailed and elaborate records of all their financial 
operations. 41 ' In spite of these provisions suggesting that price be 
based on a "calculation of costs," however, other provisions make 
it reasonably clear that absolute costs are not the sole or even 
primary basis for determining price levels. Though price hearings 
are authorized under both the 1939 and 1959 Acts, to "determine 
what are reasonable costs and charges for producing, hauling, han- 
dling and processing," 50 more significantly, they are to determine 
"what prices for milk, . . . will best protect the milk industry . . . 
to insure a sufficient quantity of pure and wholesome milk ... so 
that minimum prices which are fair and equitable to producers, 
distributors, and consumers may result." 51 To this end, the Board 
is to consider "the balance between production and consumption 
. . . the costs of production and distribution, and prices in adjacent 
and neighboring areas and states. . . ." 52 The italicized portion 
was added in 1959. Although the purchasing power of the public, 
originally included as a pricing criterion, was omitted by the 1959 
amendments, 5;J> price hearings in the state within the past few 
months establish that it, or at least consumer resistance, is in fact a 
very substantial factor limiting the price which even the producer 
will ask. 

The detailed records required by the Act also indicate an in- 
creasing preoccupation with discriminatory pricing practices of 
all kinds. 54 The present Act seems determined to stamp out, as far 
as possible, any and all forms of what is called "unfair trade prac- 
tices." 55 It enumerates certain specific kinds of pricing practices as 



,7 LAWS OF MONTANA 1959, Ch. 192, section 5, amending RCM 1947, section 

27-407. 
ih Id. 
'"LAWS OF MONTANA 1959, Ch. 192, section 9, amending RCM 1947, section 

27-416. 

r, "RCM 1947, section 27-407. 

"Id., as amended by LAWS OF MONTANA 1959, Ch. 192, section 5. 
'-LAWS OF MONTANA 1959, Ch. 192, section 5, amending RCM 1947, section 

27-407. 
" J Loc. cit. 
""LAWS OF MONTANA 1959, Ch. 192, section 8, amending RCM 1947, section 

27-414. 
x ~'Id., section 8 (a), (b), (c), (d), (e), prohibiting all forms of unfair trade 

practices, but specifically, secret rebates in any form, giving any product to 

keep a customer, price discrimination, or minimum price violations, at the 

producer, distributor or consumer level. 

Ill 



unfair, 56 but intends to include in its prohibitions any and all forms 
of secret rebates, special services, or any kind of benefit, direct or 
indirect, resulting in the "more favorable treatment" of any person, 
or the slightest reduction in the administered price set by the 
Board, for any class named in the schedule. 57 It even expressly 
forbids the slightest reduction below the scheduled prices to pro- 
ducers on the claim that the milk is to be sold to any person, 
including any agencies of the federal, state, or local government. 58 

Expanded Supervision 

These changes are fundamental in policy and practice. But this 
is not all. Much closer and more detailed supervision of the in- 
dustry is provided for by empowering and requiring the Board to 
"adopt a uniform system of accounting to be used by the distrib- 
utor" to account 59 not only for all milk received, with details as to 
names and addresses of suppliers, prices paid, and deductions and 
charges made, 60 but also for all his business dealings with producers 
and wholesalers. 61 This system includes records detailing products 
manufactured, the quantity and price of all products sold, classified 
as to kind and grade, the amount received for them, and wastage 
or loss, as well as "items of handling expense." 62 Moreover, com- 
plete records of all rentals or sales of any equipment to any person, 
with copies of the agreements connected with them, or of moneys 
loaned to wholesale customers, with supporting agreements, must 
be kept at all times. 63 Of course, the continuing right of the Board 
to "enter, inspect, and investigate the premises, or the books, papers, 
records, or documents relating to the operations of any licensee, at 
all reasonable hours, with the power to inspect and copy all such 
records," makes these records available to the Board at all prac- 
ticable times. 64 

These changes are intended to push the Board into a position of 
much more nearly complete regulation and control of the entire 
milk industry. Legislative policy decrees an increase in regulation, 
rather than a retreat from it. Once rigid price controls are decreed, 
can there be any retreat? The following further changes are in- 
tended to implement that increased regulation. 

Under the recent amendments, the basis for computing each 

*Ibid, 

57 Id. 

^Id., section 8 (e). 

~ a Hd., section 9, amending RCM 1947, section 27-416. 

•"Id., section 9 (a). 

61 Id., section 9, (f), (g), (h). 

62 Id., section 9 (a), (b), (c), (d), (e). 

03 Id., section 9 (f), (g), (h). 

fl4 RCM 1947, section 27-415. 

112 



dealer's financial contribution to the administration of the Act is 
substantially altered. 65 Originally computed on the basis of a small 
fee for each six hundred gallons of fluid milk produced or handled, 
the basic license fee now is set at two dollars per year, flat fee. 00 
However, in addition, the Board also is authorized to assess all 
licensees from two and one-half to five cents per hundred weight 
maximum for all fluid milk handled. (iT Failure to pay fees and 
assessments when due results in a thirty percent penalty. 08 The 
resulting special fund, known as the "state milk control fund," 
which also includes special fines and penalties under the Act, is 
ear-marked exclusively to pay the costs of administering the Act. 01 ' 

Taking into account the added power vested in the Board, the 
Act also was amended so as expressly to provide for the judicial 
review of all Board orders for any aggrieved party 70 and to provide 
as well for service of process on the Board in any such suit. 71 

Another new section requires every distributor to post bond of 
from one to five thousand dollars as security for the benefit of his 
producers 72 in the event of finding of improper payment against the 
distributor. Still another section requires the Board to appoint a 
special four-man local supervisory board, composed of two pro- 
ducers and two distributors, to serve in connection with any pend- 
ing price hearing, for the purposes of that hearing only.™ Pricing 
orders issued recently recite prior consultation with that Board. 

One curious omission in the present Act results from the repeal 74 
of section 27-419 of the Act, which, until 1959, expressly approved 
the use of marketing cooperatives by producers, granting them the 
authority to pay their members in the form of a "blended price." 
This omission will be considered further, below. 

Board Administration Under 1959 Act 

Almost immediately following the 1959 amendments, the newly 
constituted Board, acting through its executive secretary, took 
action to begin implementing the revised law. On May 29, 1959, 

e: Id., section 6, amending RCM 1947, section 27-409. 

m Id. 

*"Id., section 6 (a), (b), (c), to be assessed on or before April 1, payable quar- 
terly. 

6 -/d., section 6. 

w 'Id. 

7 "Id., section 12, RCM 1947, section 27-428, as amended. 

"'Id., section 13, RCM 1947, section 27-429, as amended. 

T -Id., section 10, RCM 1947, section 27-426, as amended. 

ri Id., section 11, RCM 1947, section 27-427, as amended. 

"'Id. As provided for in the title, section 14 expressly repeals RCM 1947, sec- 
tion 27-419, which expressly approved the use of the producers' cooperative 
as a marketing medium. This provision had confirmed the federal policy 
recognizing the value of such cooperatives in over-all marketing practices. 

113 



it revised its fair trade rules, 75 under the section 27-414, as amended, 
supplementing the expressed prohibitions of certain trade practices. 
This revision sought to make unlawful every practice which might 
be used to evade in any degree the established schedules; 76 it also 
sought to eliminate certain extreme competitive practices based on 
sales promotions by contests and prices. 77 This points up the re- 
newed interest in the unfair practices aspect of the Act. In Novem- 
ber 1959, the Board formally adopted an extended body of Admin- 
istrative Rules and Regulations, serving as directives to the industry 
for several purposes, 78 but dealing particularly and in considerable 
detail with the duties of distributors to keep detailed records and 
to make regular reports on them to the Board. These rules also 
deal with testing requirements, regularity of payments to pro- 
ducers, and the maintaining of complete records of such payments. 
They also require that the "associations" provided for by statute 79 
to serve as a Board "instrumentality" be composed of all Board 
licensees in an area and be organized under the constitution and 
by-laws approved by the Board for that purpose, in order to qualify 
for a percentage of the license fees authorized by the Act. 80 

From the report of the Board's executive secretary for the fiscal 
year ending June 30, 1960, there is further evidence that the Board 
has made a vigorous and conscientious effort to implement the 
1959 provisions broadening its powers and duties. 80 * It established 
12 market areas forthwith, 81 apparently blanketing the state as 
required by the Act. 82 It held 22 public hearings; 83 it made 208 cost 
surveys, and 70 investigations, and completed 5 market studies. 84 



7: 'Official Order No. 59-1, Rules of Fair Trade, posted June 1, 1959; effective 
July 1, 1959. 

T6 7d., Rule 1 (b). 

"Id., Rule 1 (a). Rules 2 and 3 largely repeated the Act's prohibitions against 
providing any special facilities to customers or giving favorable rental or 
leasing agreements on such facilities. Rule 4 prohibited the advertising of an 
intent to violate in any way the Milk Control Act and its administration. 

' s Official Order No. 59-3, Administrative Rules and Regulations. Approved 
November 21, posted November 23, effective date December 23, 1959. 

""Id., Regulations 5, 6, 7, 8, 9, 10, 11, 12. In some, though not all of the official 
pricing orders issued in 1960, the Board included a detailed form of accounts, 
showing the information called for by Regulation 7 of their rules and how it 
should be presented. 

""Id., Regulations 1 and 2. 

H,a Montana Milk Control Board, ANNUAL REPORT, July 1, 1959- June 30, 
1960. 

^Id., Administrative Activities. 

"LAWS OF MONTANA 1959, Ch. 192, section 4, amending RCM 1947, section 
27-406. 

83 Loc. cit., supra, n. 80a. 

"Id. 

114 



It distributed 5,440 hearing notices 8 "' and 3,680 copies of official 
orders. Sfi It participated in legal proceedings by obtaining three 
injunctions; 87 it filed three criminal actions, ss opposed two injunc- 
tions, 80 appeared in the Supreme Court twice, 00 and filed one civil 
recovery action. 01 In its day-to-day administration, a large part of 
its enforcement requirements are effected informally, either by a 
field representative, through the medium of a third person at the 
point of complaint, or sometimes, simply by dispatching a tele- 
gram. 92 

For this period, the Board operated with an administrative staff 
of seven, including the executive secretary, legal counsel (part 
time), one "compliance" and one "field" auditor, a hearing reporter, 
and two clerks. 93 Its stated income from fees and assessments was 
$73,061.03. 04 (Apparently, a small amount was in process of collec- 
tion on June 30, 1960.) Its principal operating expense items were: 
1. Salaries, $35,071.08; 2. Travel, $11,334.82; 3. Public hearing ex- 
penses, $6,901.39; 4. Legal and court costs, $4,359.58; 5. Sundry office 
supplies, $3,188.11. 95 It also reported a capital cost for this period: 
Office machinery and appliances, $1,925. 97. 96 Total expenses and 
costs, $68,927. 18. 0T In summary, although earlier records are not 
available for comparison, there is every indication that the Board's 
administrative operations and practices following the 1959 amend- 
ments were greatly expanded, very possibly because of increased 
revenues. Even so, it was able to operate well within the income 
derived from its administration, as required by the Act. For this, 
it is to be commended. 

CONSTITUTIONALITY 

Although the Montana Supreme Court has not directly ruled the 
Milk Control Act constitutional in a case arising under the Act, it 
readily has recognized the power of the state generally to regulate 
the milk industry in behalf of the public welfare and has given its 
approval in strong dictum to the rule of the Nebbia case in two 



8 *Id. 
m Id. 

S7 Id., Legal Proceedings. 

* H Id. 

"'Id. 

iH, Id. 

in Id. 

"-Information gained from personal interview with the executive secretary. 

™Id., Administrative Staff. 

9 7d., Financial Statement. 

''"Id., Disbursements for Administration. 

m Id. 

» 7 Id. 

115 



other leading Montana cases. 98 Although the Act might have been 
subject to attack in its original 1935 form, which was drafted as a 
pure trade regulation measure, its greatly elaborated 1939 state- 
ment of policy, based on the public health and safety as a police 
power measure, makes the power of the state not only to regulate 
strictly production and distribution in the industry, but also to 
provide for fixed prices, almost unquestioned. 99 Once the Act's 
status as a health measure is firmly established, a much larger 
degree of power to regulate fixed prices is recognized 100 — much 
greater, no doubt, than has been recognized under the Unfair Prac- 
tices Act. Probably Montana's Supreme Court would fully agree 
with the assertion in a leading Pennsylvania case that: 101 "There is 
no conceivable subject of legislation more peculiarly within the 
police power of the state than milk." And, in its most recent pro- 
nouncement in a case challenging the legality of a proposed price 
hearing, the Court found that the Board, having complied fully 
with the statutory procedures and requirements for giving notice 
of such hearing, "had jurisdiction and was acting within its juris- 
diction when the respondent court interceded. . . ." 102 It required 
the petitioner seeking to enjoin the Board from holding a price 
hearing to follow strictly the procedures for challenging such hear- 
ings provided for in the Act, which did not include an injunction, 
under these facts. 103 

Possible Grounds for Challenge 

Of course, the issue of constitutionality may arise in several dif- 
ferent ways. For example: 

1. Granting the state's general power to regulate, has it properly 
delegated the power to fix prices to the Board, rather than to the 
industry? (That is, has it satisfied the rule of Schechter, that price 
fixing cannot be delegated to the industry affected?) Has it prop- 
erly circumscribed the regulatory power delegated to the Board? 
(It must be more or less limited by the scope of the subject matter 
properly regulated, and by appropriate standards upon which offi- 
cial pricing and marketing orders are to be based.) The original 
Act might have been subject to attack on the first point because 

"State v. Gleason, 128 M. 845, 277 P 2d 530 (1954); Associated Merchants of 

Montana v. Ormesher, 107 M. 530, 86 P 2d 1031 (1939). 
""Op. cit., supra, n. 8; Highland Farms Dairy v. Agnew, 300 U. S. 608 (1937). 
u "This distinction is strongly expressed in State v. Gleason, 128 M. 845, 277 P 

2d 530, 531-532, by the Montana Supreme Court. 

""Carolene Products Co. v. Harter, 329 Pa. 49, 197 A. 627, 119 A.L.R. 235 

(1938). 
""State of Montana ex rel. Milk Control Board v. District Court, — Mont. — , 

355 P 2d 664, 669, quoting this language as controlling, from State ex rel. 

Reid v. District Court, 328 P 2d 634, 636. 
]t,: ld. 

116 



the Board's membership was industry centered and its power to 
establish market areas and set prices was conditioned completely 
on the approval of members of the industry; but these possible 
grounds were eliminated by the 1959 amendments, because the 
Board is now given plenary power to act and its members are 
chosen from the consumer class. The probability of the Montana 
Act being upheld in its present form, on the second point, is almost 
as great as is the power of the legislature to regulate to protect 
public health generally. The standards limiting the action of the 
administrative agency conform closely to those which have been 
upheld in other states. As the Board's legal counsel recently well 
stated it: "The overwhelming weight of authority supports the 
conclusion that the Montana Milk Control Act is constitutional, 
with respect to the delegation of authority to regulate fluid milk 
from the Legislature to your Milk Control Board." 104 

2. Has the legislature imposed procedural controls assuring inter- 
ested parties a full hearing and review opportunities? Procedural 
due process will require this. Since the 1959 amendments, the Act 
has a much better chance of being upheld against attacks on pro- 
cedural due process grounds because of the detailed provisions it 
now contains to assure adequate opportunity to be heard by the 
Board 10 "' and to resort to the Courts. 100 The recent decision from 
Dillon strengthens the conclusion that these procedures are ade- 
quate. 107 In this case, the Court ruled, in effect, that though the 
"judicial remedy provided for in the present Act is formally de- 
scribed as a petition for a writ of certiorari, (perhaps ineptly)," 
nevertheless, the proceedings actually described give full benefit 
both of an original action and of review, and that this is what 
actually controls— an opportunity both to introduce new evidence 
and to request a full review of the facts and of the law on which 
the Board has framed its order. 108 This is sufficient; the petitioner 
must use that remedy in opposing Board action rather than one 
which seeks to restrain the Board's administrative hearings from 
the outset. (Hence, an aggrieved party may seek to enjoin only 
matured orders which he considers illegal.) 109 

3. Have the Board and its administrative agencies acted beyond 
the scope of their delegated authority in attempting to exercise 
jurisdiction over portions of the milk industry not provided for by 
the statute? A challenge on this last ground may raise either a 
simple question of statutory construction, or one of constitutional 

l,n Op. cit., supra, n. 1, at 98. 

mr; RCM 1947, section 27-405, as amended. 

im Id., section 27-428, as amended. 

w Loc. cit., supra, n. 102. 

WH Id., at 669. 

im 'RCM 1947, section 27-428, as amended. 

117 



limitations, and can be considered only in the light of particular 
assertions of jurisdiction. Suffice it here to note, however, that 
though the powers of the Board are very broad and sweeping under 
the present Act, its executive officers realize fully that they are not 
unlimited. Their most recent pronouncements strongly suggest 
that they are most anxious to have the limits of the Act's juris- 
diction and of their authority authoritatively established. 110 

INTERPRETATION AND ADMINISTRATION PROBLEMS 

Assuming the general constitutionality of the Act and its admin- 
istration, however, the Act's administrative agency is preoccupied 
with and troubled by a number of substantial further questions, 
either as to the extent of the Agency's power under the Act, or as 
to what administrative practice will most satisfactorily effectuate 
the policies underlying the Act. Recently, its legal counsel has listed 
several crucial problems concerning the Act's administration. 111 A 
review of some of the developments in a price hearing recently 
held in Missoula for Area X may help us to understand the nature 
of these problems. 

AREA X HEARING 

The Missoula hearing, which opened on August 23, 1960, and 
lasted several weeks, was based on a very detailed notice designed 
to incorporate all the information called for by the requirements 
of the Act. 112 This included the results of cost surveys made by the 
Board for eighty-one producers in the area grouped by volume of 
annual production. 1 13 Also included for consideration was a list of 
fourteen regulations proposed by the Montana Dairymen's Asso- 
ciation, a producers' organization, as part of the Board's adminis- 
trative regulations for marketing Area X. 114 

Producers, distributors, and consumers were all represented in 
the hearing. 115 Three of the larger distributors were represented 
by legal counsel; the producers' contention that the price they 



""See the address by the Board's legal counsel, op. cit., supra, n. 1. 
""Id., at 101. 

m RCM 1947, section 27-407, as amended, implemented in the Board's Notice of 
Public Hearing on Establishment of Minimum Prices for Milk, in Area X 
(Missoula area), Aug. 23, 1960. 
m 7d., pp. 3, 4, 5. 
n4 7d., pp. 10-15. 

11 "The Board was careful to give public notice, and to include in that notice the 
detailed data called for by RCM 1947, section 27-407, as amended by LAWS 
OF MONTANA, 1959, Ch. 192, section 5, for the Area X hearing. Though it 
appointed the local advisory board ten days before the hearing, as provided 
for by RCM 1947, section 27-427, as enacted in LAWS OF MONTANA, 1959, 
Ch. 192, section 11, a question arose as to the consequences of its failing actu- 
ally to notify the local members thereof, until just preceding the hearing. The 
section does not state what notice they should be given. 

118 



received for milk must be increased was vigorously supported by 
the Montana Dairymen's Association, though individual producers 
testified in apparent opposition to these proposed increases; the 
consumers were also represented by a number of groups, each of 
which submitted petitions signed by large numbers of persons 
opposing any retail increases. The County Attorney's office also 
was represented, for the declared purpose of protecting the public 
interest. 

There was not even an echo from the past of the sentiment that 
the industry should not be regulated, or that efforts should be made 
either to restore or to maintain as much as possible of the principle 
of a free market. Everyone present apparently had been condi- 
tioned completely to think and to act within the framework of a 
very strict system of market and price controls — though, of course, 
this does not mean that all groups agreed as to how far the Board 
should dictate the nature of or regulate the producer-distributor 
relationship. But judging from the views expressed in this hearing, 
the milk industry appears to be irretrievably lost to free enterprise 
and to the free market. The very idea of freedom of competition 
seemed strange and out of place in this setting. 

The hearing examiner overruled the preliminary objections made 
by counsel for the various distributors to the adequacy of the notice 
provisions and the timeliness of the appointment of and notice to 
the temporary local advisory board, and to the hearing procedures 
adopted by the Board, noting timely exceptions so as to perfect the 
record for possible appeal. (The hearing examiner made a special 
effort to prepare an adequate record for this purpose.) Following 
equally strong insistence by both producers and distributors that 
retail prices should not be increased, the hearing got down to the 
serious business of considering evidence and testimony on the pri- 
mary issue of whether price increases to the producers should be 
granted, though the notice of the hearing covered the entire range 
of price schedules for the industry. It was agreed that the pro- 
ducers should submit their evidence first. The Montana Dairy- 
men's Association was the principal party offering evidence and 
testimony at this point, and covered far more than the immediate 
issue of prices in supporting the wide range of regulations which 
they had proposed. 

Montana Dairymen's Association's Arguments 

This Association placed itself squarely behind the thesis that 
the industry requires much more comprehensive and stricter regu- 
lation than it has had in the past, particularly in the producer- 
distributor relationship, which, the Association insisted, was rapidly 
acquiring various unique characteristics previously unknown in 
modern industry as the direct and inevitable result of public regu- 

119 



lation and controls. The premise on which this Association based 
its recommendations, with supporting testimony, was that rigid 
governmental regulation of the milk industry over the past twenty- 
five years has placed the individual producer more completely at 
the mercy of his purchasing distributor than he ever was under a 
free market. Therefore, a large percentage of the distributors will 
take the fullest possible advantage of the producer, unless regu- 
larly, alertly, continuously, and completely supervised at every 
step. Further, according to this argument, the dairymen's associa- 
tion contemplated by the Act for each area, to provide the Board 
with information and counsel, is completely unrealistic, for it is 
composed of all licensees, both producers and distributors, and thus 
combines in one organization groups with naturally conflicting 
interests. A genuinely independent producers' marketing coopera- 
tive, to represent exclusively the producers' interests, is inevitable; 
hence, the Montana Dairymen's Association was organized under 
section 14-401, RCM 1947, qualifying under the Federal Agricultural 
Marketing Adjustment Act. 110 So goes the argument. 

The first important question to emerge from this hearing there- 
fore was, "Is there a need for a producers' cooperative in a regu- 
lated milk industry and would it prove to be a useful instrumen- 
tality for more effective administration of the Act?" But we shall 
postpone formal examination of that question until we have con- 
sidered the two principal topics to which the Dairymen's Associa- 
tion devoted most of its attention: 1. Price, in its widest applica- 
tion, with the closely related requirements for adequate records 
and auditing; 2. The alleged need for protecting the producer 
against arbitrary and discriminatory treatment by more substantial 
recognition of his rights in relation to his distributor, and by effec- 
tive legal protection of those rights. Several of the regulations 
proposed already have been approved and even incorporated, in 
whole or in part, in marketing orders for other areas by the Board. 
Nevertheless, since the regulations proposed in the Area X hearing 
are far-ranging and comprehensive, perhaps covering more issues 
than have been raised in any previous hearing in the state, they 
merit at least summary consideration. 

Field Auditor's Pricing Criteria 

On the price issue, the Association was in full support of the 
cost audits made by the Board's field auditor on the basis of what 
is known as a "dry lot" operation of a producer unit, which attempts 
to include in the cost analysis all "real costs," (i.e., total capital 
application) in contrast to "actual cost" (i.e., "out-of-pocket" ex- 
penses). Futhermore, for those concerned with establishing a cost 



n,, 7 U.S.C.A. sections 291-292 (1953). 

120 



basis which will justify the introduction of new or additional capital 
investment in a dairy producing operation, the fact that this "dry 
lot" basis for computing costs separates the operations of the re- 
maining parts of a farm from the dairying operation is especially 
attractive. And, on a strictly cost accounting basis, that method of 
cost computing cannot be attacked successfully. However, the dis- 
tributors were able to present evidence from a number of other 
producers tending to show that costs were very considerably lower 
than the Board's field audits had shown and, further, that they felt 
they already were receiving reasonable prices for their milk. It 
will be shown shortly that this variation in estimated operating 
costs not only is not surprising, but actually is inevitable. 

CODE'S PRICING CRITERIA 

As we have seen, some of the Code's language suggests that the 
job of the Board is to establish actual production costs and to set 
fixed prices for the industry accordingly, as where it says that 
prices "shall not be fixed higher than is necessary to cover the costs 
of ordinarily efficient and economical milk dealers. . . ." m As will 
be recalled, that was the contention also under the Unfair Practices 
Act. Although the attempt to make such administered costs con- 
clusive was successfully attacked under the Unfair Practices Act, 
there is little danger of successful attack on the Milk Control Act 
on that basis, because, as an incident of its special police power to 
regulate on behalf of the "public health and safety," its price fixing 
provisions may be much more nearly absolute. Our question here 
thus turns primarily on the presumed legislative intent, i.e., what 
kind of price fixing authority will best implement the general pur- 
poses of the Act? But even on this basis, the soundness of com- 
puted costs may be questioned. D. A. Clarke, Professor of Agricul- 
tural Economics at the University of California at Berkeley, cites 
California's experience in milk control as clearly demonstrating 
the highly unsatisfactory character of a pricing system based simply 
on "computed costs." 

CALIFORNIA PRICING EXPERIENCE 

Clarke states some of the objections to such pricing in substan- 
tially these terms: The seemingly plausible statement that milk 
prices can be established simply on the basis of calculated costs is 
a fallacy. 1 1S Prices for many factors are not really known; they are 
determined in terms of value in the production of milk, rather than 



" 7 D. A. Clarke, Cost of Production, Processing and Distribution as a Basis for 
Establishing Milk Prices Under Market Orders, PROCEEDINGS, 25th AN- 
NUAL DAIRY INDUSTRY WEEK, MONTANA STATE COLLEGE— PART 
II, MILK PRICING 45 (1960). 
us Id., 48. 

121 



in terms of a fixed "cost on the market" basis; i.e., they are "price 
determined" rather than "price determining." 110 Hence, equally 
competent analysts will arrive at widely different figures, depend- 
ing largely on the particular assumptions and arbitrary decisions 
inherent in their procedures. 120 (This sounds remarkably like Pro- 
fessor Coad's objections to the Trade Commission's formulae for 
computing costs of doing business.) 1 - 1 But even if there is arbitrary 
agreement on these arbitrary figures, the costs of producers using 
them will vary greatly. 1 - 2 For example, the computed costs of 
eighty-nine producers in the Los Angeles area ranged from $3.35 
to $6.00 per hundred weight. For eighty-four producers in the Bay 
area, they ranged from $3.00 to $8.36 per hundred weight. l23 What 
would be the proper market price for these producers? (The limit- 
ing provision in the Montana Code, that the price shall not be set 
higher than necessary to cover the costs of the ordinarily efficient 
and economical milk dealers, 124 is certainly not nearly as helpful as 
it may seem.) Clarke says there is no answer to the question, 
"Whose costs shall be used?" At best, computed cost is only one 
of several criteria that may be used to determine price. 12 "' The Cali- 
fornia experience provides ample evidence that increasing the role 
of such cost calculations in price setting will cause excess rigidity 
and increased inequities in the milk price structure, resulting either 
in the collapse of the milk market order or in the development of 
pressures ultimately leading to chaos in the dairy industry. 120 

Though it maintained extended production cost studies for many 
years, California's agency abandoned those procedures about 1955, 
substituting for them a detailed budget for a typical dairy farm 
operation in each of several important producing areas. Computing 
costs for these hypothetical operations, coupled with all other rele- 
vant cost data, helps form a judgment on what will happen to 
production, given a certain price. 127 

FEDERAL PRICING EXPERIENCE 

Professor Clarke's judgment is reinforced by the experience and 
findings of the Federal Agricultural Market Service, which appear 
fully to support these conclusions. Under federal milk regulations, 



l9 Id., 46. 

-"Loc. cit. 

-'Coad, Are Montana's Price Fixing Statutes Valid?, XI MONTANA LAW 

REVIEW, 21, 30-35 (1950). 

--Op. cit., supra, n. 117, at 46-47. 

'-"Id., 47-48, and chart, page 49. 

L>1 RCM 1947, section 27-407 (c), as amended. 

s 'Op. cit., supra, n. 117, at 48. 

M Id., 52. 

"Id., 50. 

122 



only the prices to the producing farmers are regulated. For the first 
several years, an inelastic, fixed price was set. 128 But finally, about 
1941, the federal regulators shifted to a formula basis which was 
tied ultimately to the prices established in competitive markets. 
This system preserves a substantial amount of price competition 
for all federal markets. 129 

Indeed, it is reasonably clear, when effect is given to all the 
provisions of Montana's Act, that it does not intend that prices be 
based on a mechanical application of computed costs. Notwith- 
standing its proviso that price for any purpose shall not exceed 
that needed by the ordinarily efficent producers, and the specific 
requirement that the Board take into account the cost of production 
and distribution, 180 these are only two of several such factors, which 
also include: 3. A balance between production and consumption; 131 
4. Prices in adjacent and neighboring areas and states, so that prices 
will be equitable to everybody concerned; 132 5. Board hearings to 
determine "What prices . . . will best protect the milk industry in 
the state, and insure a sufficient quantity of pure and wholesome 
milk, . . . and be most in the public interest." 133 

ADMINISTRATOR'S PRICING DILEMMA 

The administrator of Montana's Act is very much aware of this 
host of questions on price determination which that Act raises. 
Not only does the Board state the purpose of public price hearings 
in terms of the last directive, ". . . to insure a sufficient quantity 
of milk," 134 but the director asks a series of questions of his own as 
to the criteria to be used in trying to implement that provision. 135 
He might well have added the question, "By what criteria do we 
determine the 'ordinarily efficient and economical milk dealers?', " 
in the provision limiting price to the needs of that class. 136 Further- 
more, although the purchasing power of the public as a factor in 
determining equitable prices (present in the Act for nearly twenty- 
five years) 137 was omitted in the 1959 amendments, 138 it inevitably 

'-"Hugh L. Cook, Principles and Formulas For Pricing of Milk, 25th ANNUAL 
DAIRY INDUSTRY WEEK, MONTANA STATE COLLEGE PART II, MILK 
PRICING 67 (1960). 
'-"'Id. 

ja "RCM 1947, section 27-407, as amended. 
m Id. 
v,2 Id. 
133 Id. 

VM E.g., Notice of Public Hearing . . . , supra, n. 112, at p. 1. 

135 T. P. McNulty, What Can the Montana Milk Control Board Do to Solve the 
Pricing Problem?, op. cit., supra, n. 128. 
KW RCM 1947, section 27-407, (c), as amended. 
|:i7 RCM 1947, section 27-407. 
ia *LAWS OF MONTANA 1959, Ch. 192, section 5. 

123 



will be an additional factor in any judgment as to what market 
prices — production, wholesale or retail — should be set. 

Even though the producers' association strongly supported the 
computed prices of the Board's field auditors, it did not venture 
to ask for a price giving full effect to those asserted costs. Its 
suggested producer price was $5.71 per cwt., l:i9 six plus cents less 
than the lowest group cost computed ($5,774 per cwt.). 140 Indeed, 
some of the Association's witnesses testified ruefully that after 
the last retail price increase their milk checks were smaller than 
before because of the purported decrease in consumption. 141 Further, 
the producers are very sensitive to the danger of pricing themselves 
so high as to attract competitive milk from the Spokane area. 
Apparently Area X is near that breaking point right now. 

EASTERN MONTANA EXPERIENCE 

The reality of that danger is forcefully demonstrated by the 
experience of the producers in the Glendive-Sidney-Miles City 
area. Having asked for a hearing, they got approval of their price 
increase request quickly, because their distributors did not oppose 
them. 142 But immediately they found themselves on an island of 
high prices. Imports both from other Montana areas and from 
North Dakota are entering, and they know that they also will have 
to face extensive operations by chain stores in the latter's develop- 
ing practice of bottling and retailing milk. 14 '"' Moreover, other reports 
at the Dairy Conference at Bozeman in November 1960, make it 
clear that they may be subjected even to competitive milk from 
Minnesota and Wisconsin. 144 



^"Notice of Public Hearing . . . , supra, n. 112, at p. 12, Proposal No. 12. 

yi,, Id., 5. 

H1 A difference of opinion developed on what was the cause of the reduction in 
the amount of the milk check. 

U2 Ford Martin (Farmer), Pa7iel Discussiori: Current Problems Facing Milk 
Producers and Distributors, op. cit., supra, n. 128, at p. 10. 

i% *Id. 

"'Hugh L. Cook, Inter -Regional Competition in Marketing Milk, op. cit., supra, 
n. 128, at 21. From Wisconsin, Cook states that, "The competition you face 
from us is much greater than you would expect under ideal conditions. . . . 
Wisconsin could turn westward in search of markets, if there was a fairly 
small shift in price relationships." Id., 22. In correspondence, dated June 8, 
1961, the Board's executive secretary discounts the grounds for fear of im- 
ports in eastern Montana, saying that the prices set there had been tested for 
eight years, on the High Line, and had attracted no imports. He also states 
that it is the distributor who generally is concerned about out-of-state milk. 
But Martin is a producer, and our discussion is in terms of developing 
prospects. Cook's remarks strongly indicate that such prospects are very 
real. Further, he credits new technology producing concentrated fluid milk 
with greatly increasing those prospects, with the enormous surpluses now 
developed in Wisconsin. Id., at 29. He also notes that large retailers, like 
Safeway, are much more likely to go great distances for their supply, with 
the slightest advantage offered, than local dealers. 

124 



In terms of this study, the one most striking, if not discouraging, 
fact that emerges from all discussion by those connected with the 
milk industry in Montana is that they are anxious to avoid any- 
thing remotely suggesting price competition in the milk industry, 
anywhere in the state, and intend to do everything they reasonably 
can to avoid it. There seems to be one hundred percent agreement 
on this point among all the industry groups, as well as the admin- 
istrative agency. Apparently, prices must be set so as to discourage 
the entry of milk, or of producers, from the outside. Though 
frankly granting, in a personal interview, that under federal regu- 
lation's pricing formulae at least a residuum of price competition 
survived, even though it might be gauged by a distant market, the 
Board's executive secretary frankly stated that Montana's Milk 
Control Board has a primary responsibility to the milk industry 
in Montana to so administer prices as to keep that industry in an 
optimum economic condition and that there was no place for price 
competition within that framework of administrative policy. And 
while he frankly approved a formula basis for pricing at the Boze- 
man Conference (though assuming, perhaps, that the present Act 
does not permit it), 145 the Board's director declared that he preferred 
a formula based on "alternative farming opportunities" for Montana 
farmers 140 to either an adjusted price based on a Midwest competi- 
tive market or a blend of federal order prices from adjacent mar- 
kets. His reason was that it "is better adapted because then we 
will be taking into consideration conditions that affect Montana 
producers on a local level" rather than a plan "geared to some other 
markets operating under different conditions." 147 Further, in enum- 
erating some of the problems yet to be solved for Montana's milk 
industry, the Board's legal counsel included one on, "How to dis- 
courage interstate competition without burdening interstate com- 
merce." 148 As we already have noted, however, the producers and 

ur 'Op. cit., supra, n. 135, at 87. 

u "Id. 

ul Id. The proposal which Mr. McNulty apparently has in mind here receives 
support from Professor Edward H. Ward, Professor of Agricultural Eco- 
nomics, Montana State College, in his doctoral thesis entitled THE IN- 
FLUENCE OF TECHNOLOGICAL AND LEGAL CHANGES AND THE 
LIKELY INFLUENCE OF CONCENTRATED MILK ON THE OPERA- 
TION OF THE MONTANA MILK CONTROL LAW, Chapter V: Sug- 
gested Changes in the Montana Milk Control Law, 4. Introduction of a 
Formula to Determine Price Rather than the "Cost of Production," 96-100. 
This formula would be based on "the ratio of the index of prices received 
for all agricultural products in Montana to the index of prices paid by 
Montana farmers and ranchers. . . ." Thus, that ratio should be kept at least 
as favorable to the farmer in the dairy industry as it is in agriculture gen- 
erally, to maintain its attractiveness in terms of "alternative opportunities." 
However, two additional factors to be considered in pricing are: 2. Pro- 
portion of Grade A milk used for fluid purposes; 3. Relationship between 
milk prices in Montana and potentially competing areas. Id., 98-99. 

us Op. cit., supra, n. 1, at 101. 

125 



their Association are extremely sensitive to the limiting effects of 
consumer demand. Thus, in these indirect ways, both the pur- 
chasing power of the public and potential competition from the 
outside serve in some measure to limit price increases within the 
state. These may be said to be the only competitive elements re- 
maining in the milk industry. 

"BASE" 

The readiness of everybody connected with the milk industry 
in the state to accept a rigidly administered industry, regulated by 
a public agency, is exemplified by their acceptance of and submis- 
sion to profound changes in the economic structure of the industry, 
and in the relationships between the various production-distribu- 
tion groups. Substantially all of those characteristics traditionally 
associated with what may be called democratic capitalism, such as 
the free market and autonomy of action, including the freedoms of 
contracting, have disappeared from the industry. This development 
appears to have been inevitable under the declared purposes of the 
Act and the powers vested in its administrator. 

The Board is vested with the general powers and duties, "to 
supervise, regulate and control the fluid milk industry, including 
the production, transportation, processing, storage, disposition and 
sale of milk, in the state of Montana. . . ," and to so price milk "as 
will best protect the milk industry in the state and insure a suffi- 
cient quantity of pure and wholesome milk, . . . [as will] be most 
in the public interest." Further, the legislature has intended to 
give the Board all the incidental powers necessary to implement 
those stated. Its powers are therefore sweeping — very nearly 
plenary. 

It is quite generally agreed that to achieve these stated purposes 
it is necessary to assure a healthy, stable industry, and that a 
healthy industry inescapably requires such measures as the stabil- 
izing of production, the leveling out of seasonal fluctuations in that 
production, and the assurance of prices to all the producing units 
which will be adequate for their economic health and growth. 
Once the Act's purpose is clear, it simply becomes a question of 
what means are necessary to achieve that purpose. 

DISTRIBUTOR'S DOMINANCE 

Milk production has become a quasi-public utility, though cer- 
tainly not a natural monopoly. However, a developing tendency 
in the industry (very possibly encouraged by the near assurance 
of a profit for the milk distributor under regulation) has been the 
national trend toward oligopoly at the processor-distributor level. 
But in any case, the number of processors in each area is limited, 
and, under an administered regimen demanding stability of opera- 

126 



tions, most producers become dependent on a particular distributor 
as their sole source of outlet. In view of the distributor's special 
position in the marketing process, this places him in a uniquely 
dominant situation. The extent, variety, and attractiveness of his 
manufactured products from milk depend on his own resource- 
fulness and energy, as does the development of additional markets 
for his so-called surplus milk. 

Obviously the entire industry is benefited by aggressive, effec- 
tive marketing practices which increase the demand for milk prod- 
ucts in all forms, enlarge outlets for that product, and expand the 
markets therefor. Generally, the distributor is the natural link 
in the production-to-consumer chain in the best position to stimu- 
late product demand, first for himself, but also for the producer. 
So, even in this regulated industry, in order to maintain the health 
of the industry it seems to be necessary to allow the distributor 
considerable freedom in the operation of his business. But except 
as limited by the Board's rigorous supervision, that very fact places 
the distributor in the position of dominance mentioned above, per- 
mitting him largely to dictate his own milk buying policies, to 
assure a flow of milk in conformity with his own requirements 
(and wishes), to obtain milk on favorable terms, and as one ob- 
server puts it, "to accomplish various other objectives." 149 Allegedly, 
distributors often encourage increases in production, though they 
may almost immediately classify much of it as surplus or overbase, 
which brings a much lower price. 150 But surplus milk costs just as 
much to produce as does Class I milk. So, in reliance on the distrib- 
utor's "good intentions" and in response to the latter's persuasions, 
producers often make major expansions and go deeply in debt in 
an effort to meet their distributor's demands and requirements. 
Tied down by the obligations resulting, most frequently it becomes 
impracticable if not impossible for them to shift to other opera- 
tions. 151 

Indeed, in the present state of the industry, the producer is far 
more closely tied to, and dependent upon, his distributor than is 
the individual factory worker to his employer. The similarity in 
the relative "dominant-subordinate" position of the parties in the 
two relationships is striking. Certainly, unless held to strict ac- 
countability, the distributor is in a position to specify the conditions 
under which he will purchase milk from his producers. Apparently, 
the individual producer often has felt almost defenseless. 152 

Charges and proposed regulations introduced in the Area X 



""Jack R. Davidson, Milk Buying in Montana, op. cit., supra, n. 128, at 15, 16. 
,: '"Id., 18. 
™Id., 15, 16. 

ir '~Id., 15, 16, 18. Much of the testimony in the Area X hearings, in August- 
September, 1960, demonstrated this feeling of individual helplessness. 

127 



hearing in Missoula by the Montana Producers' Association, will 
illustrate. Of course, the most obvious way to give the producer 
protection is to require detailed records of milk received, its classi- 
fication and the uses to which it was put by the processor, with 
regular and frequent auditing of these records by the Board and 
with frequent payments to the producers required. Detailed pro- 
visions in the 1959 amendments intend to require these procedures, 
and the regulations proposed by the Area X producers' association 
dealt extensively with this aspect of the Board's supervision and 
control. These provisions do not, however, give the producer the 
assurance of an outlet that he requires to regularize and stabilize 
supply and correlate it with market needs. 

DEVELOPMENT OF "BASE" 

Various methods have been used to encourage producers to level 
out and stabilize their milk supply, assuring consumers an adequate 
supply at all times. One of the most common practices has been 
to establish a "base" for each supplier of a processor, by allocating 
to the former a certain portion of that plant's milk needs. 1 " 33 Although 
different formulas have been used to establish such a "base," the 
most common one is first to establish the "plant base" — the total 
supply of Grade A milk needed by the plant for a given period, 
measured generally during a naturally short supply period — and 
then to divide this amount among that plant's suppliers according 
to their demonstrated capacity to produce. 154 This procedure is in- 
tended to encourage the producer to maximize his production 
during his naturally low production period and thus to level out 
his production for all the season, approximating an equalizing of 
supply and demand. He is given a "premium price" (really the 
standard price) for the milk supplied within his assigned "base" 
quantity, but his "excess" is classified as surplus, the price of which 
is set by the distributor himself, 155 based on what he claims is its 
value to his manufacturing business. 

ALLEGED ABUSES 

The Montana Dairymen's Association introduced testimony to 
support several charges against the distributors, apparently typical 
of those filed in hearings over the state generally. An observer 
at several recent price hearings over the state, Professor Jack R. 



™Id., 17, 18. 
l5i Id. 

nc ld. Actually, assigned "base" does not guarantee "Class I" or even "Class 
II" prices for all of base. "Surplus" milk, whether resulting from produc- 
tion in excess of the assigned base, or from the distributor classifying part 
of the "base" as surplus, brings a much lower price than Class I milk, 
generally roughly one-half as much. 

128 



Davidson of Montana State College, has generalized those com- 
plaints in the following terms: 150 

1. Favors one producer at the expense of others, on the basis of 
personal relationships, even though the disfavored one shows will- 
ingness, ability, and even need for an increased production level. 

2. Admits new producers to share in limited Class I market while 
denying established market producers any market gains. 

3. Often requires production and delivery of "overbase" milk even 
though presumably uneconomical for him to handle it. 

4. Suspends contracts and causes economic hardships for personal 
reasons and uses threat of suspension to prevent producer testimony 
at price hearings. 

5. Fosters problems by denying any producer interests in "base." 

6. Inadequate accounting of usage and unsatisfactory evidence that 
producers are paid according to usage. 

Davidson observes, however, that, 157 

This is not to imply that all these charges are well grounded in 
every case or that all distributors are guilty of these practices. Some 
distributors have, through concern with the welfare of the pro- 
ducers or due to the ability to read the "handwriting on the wall," 
have (sic) taken positive steps to resolve these problems. . . . Experi- 
ence has shown that producers will support soundly designed, well 
administered plants which they understand even when not entirely 
satisfied in all respects. 

The Association's charges and testimony provided concrete illus- 
tration for practically every one of these charges. But it added one 
not mentioned by Mr. Davidson. This was that distributors in 
Area X have tried forcibly to prevent their producers from being 
members of the Montana Dairymen's Association. 

RELEVANT LITIGATION 

The Area X hearings were in August and September 1960. In 
March 1961, two suits were filed against an Area X distributor, 
based on events allegedly occurring since that hearing. One is by 
the Dairymen's Association itself, charging that the distributor has 
caused members of the Association to withdraw from it, breaking 
continuing contract and business relations; i.e., unwarranted and 
malicious interference with a group of valuable contract and busi- 
ness relations. 158 The other suit is by individual members of this 
Association, charging the same distributor with unlawfully threat- 
ening to terminate their producer-distributor relation by having 
served notice that it would buy no more milk from them after 
March 8, 1961 — this even though the producer had a heavy invest- 
ment, had been a long time producer, had built up a large "base," 
and just recently had installed expensive handling equipment, not 



™Id., 18. 
™Id. 

ar ' 8 Montana Dairymen's Association v. Beatrice Foods, et al., District Court, 
4th Judicial District, Missoula County, File No. 24, 493. 

129 



yet paid for, from his distributor. 1 59 The producer also claimed that 
it would be impossible for him to find any other outlet for his 
milk. 100 

To this, the defendant answered that "Many producers during 
the past years have left the [defendant] Creamery and ceased to 
sell milk to . . . some with notice and some without . . . and that 
has always been the custom of the trade. Every producer felt at 
liberty to quit dealing ... at any time he wanted to . . . and in fact, 
during the fall of 1960, approximately six producers did cease sell- 
ing their milk to [the defendant]. . . ." About a dozen former 
producers were named who had quit before September 1960. The 
plaintiff questioned whether any of these had been assigned base. 
As to the six quitting after September 1, 1960, they testified that 
they all were having a large percentage of their base "surplused," 
so they were sure their distributor did not need their milk; other- 
wise they would have felt obligated to continue with the defendant. 
The plaintiff sought and obtained a temporary injunction. 

Presently at the trial stage, the plaintiff in this latter suit called 
as witnesses six bankers from five different communities, 101 repre- 
senting two widely separated marketing areas, 102 all of whom testi- 

J, T)elbert Palmer and E. M. Palmer, d/b/a E. M. Palmer and Son (partner- 
ship) v. Beatrice Foods et al., District Court of the 4th Judicial District, Lake 
County, File No. 5,590, later transferred to Missoula County, under File No. 
24,521. In the above suit, n. 158, File No. 24,493, in a sworn statement, 
Deibert Palmer testified to the following, in substance: 

E. M. Palmer & Son have been producing for their distributor for seventeen 
years, one of the distributor's oldest producers. Several years ago they 
built a walk-in cooler costing about $5,500, which was used until the dis- 
tributor insisted they install bulk tanks or lose their market for milk. 
Palmer & Son were assured they would not have a market unless they 
bought a refrigerated tank from their distributor, but upon purchase, they 
would have a market as long as they were paying for that tank. Such 
purchase saved hauling costs for the creamery, by permitting every-other- 
day deliveries. By 1958, dairy inspectors said their milk barn was obsolete, 
so they tore it down, and built an entirely new set-up, with large milk 
room, elevated stalls, milk barn, pipeline milking equipment and large 
water heater installed, at a cost of many thousands of dollars. In 1959, to 
avoid increased bacterial count from poor barnyard drainage, at a further 
cost of many more thousands of dollars, they filled and concreted their 
entire cowyard. They also "went all the way" in complying with a dis- 
tributor notice, in December 1960, saying that any producer with a water 
supply not complying both with State requirements and "certain arbitrary 
requirements established by" the distributor would be cut off. Their herd 
"will pass the highest standards of herd health" and has a very high pro- 
duction record. Transcript of Proceedings, held March 6, 1961, File No. 
24,493, pp. 6-8. 
""Plaintiff's Complaint, filed in Palmer v. Beatrice Foods, supra, n. 159, p. 3, 
allegation V. 

^'Defendant's answer, filed in Montana Dairymen's Association v. Beatrice 
Foods, supra, n. 158, page 5, allegation V. A transcript of the testimony, for 
citation, is not available. Similar testimony was given in Palmer v. Beatrice 
Foods, File No. 24,521, supra, n. 159. Transcribed excerpts of testimony by 
Deibert Palmer, on April 13, 1961, pp. 8-9, prepared at defense counsel's 
request. 
I6 -'The banks and communities represented were as follows: One bank each 

130 



fied that their banks ". . . are unable to loan money to dairymen 
because of the instability of the dairymen's position, market- 
wise. . . ," 163 

Of course, the writer passes no judgment on the merits of these 
particular charges. Suffice it to say that not only is the tort of an 
unjustified interference with another's business contracts and rela- 
tionships — expected business advantages — fully recognized in the 
modern law, 1(i4 but it has received specific application in the milk 
industry, involving substantially the kind of contracts with which 
we are here concerned — the cooperative marketing association- 
member relationship. 1 <;r ' Both statutory and case law in Montana 
also support this general rule. 1,i<; But, in the second suit, even if the 
plaintiff should be entirely successful in receiving all of the relief 
he asks for, it will be altogether inadequate in protecting him and 
his very large investment, if, in fact, the industry has become so 
modified that the transfer from one distributor to another, with 
full preferred rights, is becoming very difficult or impossible. He 
will continue to have an outlet under the Class I schedule only 
until the spring of 1962. 

LEGAL STATUS OF "BASE" 

Several of the charges of discriminatory treatment of producers 
by their distributors point up one of the sharpest issues in the 

from Poison and Ronan in the Flathead Valley, about seventy miles north of 
Missoula; one each from Stevensville and Victor and two from Hamilton, all 
in the Bitterroot Valley, about fifty miles south of Missoula — two widely 
separated heavy dairy producing centers. The writer heard similar testimony 
in the Area X hearing, in August 1960. 

" K The writer heard similar testimony in the Area X hearing, in August 1960. 
:H4 Prosser states the basis for this tort action thus: "One type of interference 
with economic relations has been marked out rather definitely by the courts, 
and regarded as a separate tort, under the name of inducing breach of 
contract, or interference with contract. Its family tree goes back to very 
ancient times, when it was not the existence of a contract which was im- 
portant, but the status, or relation recognized by the law." Prosser, HAND- 
BOOK OF THE LAW OF TORTS 976 (1941). He adds: 

The interference may be privileged if its purpose is the protection of a 

sufficient interest of the defendant. . . . Pursuit of the defendant's own 

advantage, as in the case of business competition, is usually not sufficient. 

Id., 972. 

The classical decisional basis for the modern rule is Lumley v. Gye, 118 

Eng. Rep. 749 (1853); 1. Eng. Rul. Cas. 707. The fact that the interference 

alleged involves more than contract — it involves organizational membership 

for mutual benefit — strengthens rather than weakens the substance of the 

right of action. See, RESTATEMENT OF TORTS, sec. 766, Comment b 

(1939). 

:tt5 Pure Milk Association v. Kraft Foods, 8 111. App. 102, 130 NE2d 765 (1955). 
:rt "RCM 1947, section 58-601 states that: "Every person is bound, without con- 
tract, to abstain from injuring the person or property of another, or infringing 
upon any of his rights." This section has been construed as being declaratory 
of the principle of Lumley v. Gye, applied to contracts generally, in Simonsen 
v. Barth, 64 Mont. 95, 208 P 938 (1922), and in Burden v. Elling State Bank, 
76 Mont. 24, 245 P 958 (1926). 

131 



regulation of the milk industry today. The question is, "What is 
the legal status of this thing called 'base'?" The Dairymen's Asso- 
ciation pressed its proposals for regulating base more vigorously 
than any other — understandably so, because it is in the handling of 
base that a distributor is in the best position to coerce, discriminate, 
and injure a producer if he wishes to. The dairymen introduced 
evidence to show that "earned base" is absolutely essential to estab- 
lish and maintain the economic stability and integrity of a pro- 
ducer's business. To this end, witnesses testified that whatever the 
value of a particular cow, an established "earned base" for it, i.e., 
an assured outlet for that cow's milk supply, added two to three 
hundred dollars to its salable market price. In the hearing, the 
Association also introduced testimony similar to that given in the 
law suit described above, asserting the inability of banks to extend 
credit to dairymen under present conditions. 

BOYLAN CASE 

The Boylan case, arising in Bozeman and decided in early 1960, ir>7 
also tends strongly to support the critical importance to producers 
of having their proprietary interest in base formally recognized 
and fully confirmed by the law. This was an action by the Board 
seeking an injunction against Boylan, a producer living near Boze- 
man, to prohibit him from selling milk at less than the minimum 
prices set by Board order. From testimony, it appears that the 
defendant, Boylan, was a member of the local processor cooperative, 
but that allegedly he had had a dispute with its manager as to 
whether he was being overcharged for transportation and also as 
to whether he was being charged for advertising, contrary to law, 
and that as a result the Coop had informed him that it would take 
his milk only at surplus prices. 1 <ls The findings of fact made by the 
Court included the following: 109 

1. That there are only two licensed distributors in Bozeman, the 
Gallatin Cooperative and Kessler Dairy Incorporated; that the former 
notified the defendant that he could only sell milk to it as surplus 
and that Kessler's "will only receive defendant's milk as surplus, 
for at least one year." 

2. That in the Bozeman marketing area, surplus milk only provides 

] " 7 Montana Milk Control Board v. Boylan, District Court, 18th Judicial District, 
Gallatin County, File No. 14,207. 

1,iS Actually, there is little in the Court record bearing on these allegations. 
The Court made no finding of fact on these points. However, it did 
make a finding in its Finding of Fact No. 13, that the defendant had complied 
with all of the applicable public health regulations. Findings of Fact and 
Conclusions of Law, filed in the Boylan case, supra, n. 167. The Board re- 
portedly understands that a principal substantial issue between the defendant 
and his cooperative involved compliance with quality standards set and 
adopted by the cooperative, to which the defendant was subject. Correspond- 
ence, dated June 8, 1961. 

""'Findings of Fact, No. 8 and No. 9, in the Court's Findings of Fact and Con- 
clusions of Law, filed on February 11, 1960, File No. 14,207. 

132 



a price of approximately twenty-two cents per gallon, at the same 
time that the distributor pays the producer forty-four cents per 
gallon for Class I milk. 

Apparently, these findings both impressed and disturbed the trial 
judge, because they led him to make some preliminary observations 
(something he rarely does), 170 including the following: 

7. That this Milk Control Act, that started as a shield for the em- 
battled and poverty stricken dairy farmer, may well end as a sword 
to destroy his economic freedom. 

In the Area X hearing, in which the Dairymen's Association 
insisted that earned base should be treated as personal property, 
transferable with the cows supporting it, the distributors main- 
tained that earned base arises from simple contract rights for the 
time being; that all relationships in the dairy industry should con- 
tinue to be measured and limited by principles of freedom of con- 
tract, and should be terminable equally at the will of either party. 
That is what they also claim in the current litigation. On these 
premises, the allocation and re-allocation of base should be at the 
discretion of the distributor. Perhaps it is on this issue that we have 
the most dramatic illustration of the conflict between a genuinely 
free market, with its internally consistent principles, doctrines, and 
ideas, and a rigidly regulated market, with its system of adminis- 
tered prices involving those principles, doctrines, processes, and 
conceptions the system requires. 

"BASE" AND THE BOARD 

The attitude of the Board on earned base is expressed in the 
regulation contained in some of its area price orders 171 directing that 
earned base should attach to and be transferred with the sale of 
an entire herd. However, it has not as yet gone so far as to approve 
the principle of base as personal property, transferable with each 
cow. 172 Its official position on the legal character of base is that the 



17 "Ibid., Preliminary Observation No. 7, in Introduction. 

17, The provision dealing with the matter of transfer of base has been standard- 
ized. It is illustrated by the provision found in Official Price Order No. 60-7. 
effective Oct. 1, 1960, for Market Area No. IV, Art. Ill, Section 3 (d), page 11. 
172 Apparently, the thinking of the industry itself, and the practice in the dairy 
cow market, has not yet gone so far as to attach "base" to the individual 
cow. In describing the general practice of transferring base with the sale 
of cows, one of the largest producers in the Missoula area recently testified 
that it was the general practice to transfer it with the sale of an entire herd 
only. Official Transcript of Testimony, page 65, in Montana Dairymen's 
Association v. Beatrice Foods, District Court, 4th Judicial District, Missoula 
County, No. 24,493, March 6, 1961. Also see: DAVIDSON, op. cit., supra, 
n. 128, at 18. In its proposals submitted in the Area X hearing, August 1960, 
however, the Montana Dairymen's Association urged that, " 'Base' shall be 
considered personal property with all of its legal aspects and incidents. . . . 
A base computed pursuant to the above may be transferred in its entirety 
or partially, . . ." Notice of Public Hearing, etc., supra, n. 112, Proposal 
No. 3, page 11. 

133 



entire concept is an important one incidental to the proper regula- 
tion of the industry as a whole to achieve the Act's purposes; in- 
deed, its very existence is dependent on and flows from the compre- 
hensive regulation of the industry, so as to stabilize supply in 
relation to demand. Hence, base is an instrumentality of that regu- 
lation over which the Board must itself retain a major amount of 
supervision and control. Thus it cannot be treated either as the 
exclusive personal property of the producer, or as an incident of 
the distributor's business to be disposed of freely as he may 
choose. 1 73 At present, presumably, the Board feels that to provide 
that base should go with an entire herd, as it does, should be suf- 
ficient protection to the bankers to assure a credit market for the 
producers. 

ALTERNATIVE DEMOCRATIC TECHNIQUES 

Surely enough has been said on price and base to make clear that 
all semblance of the free market has disappeared in the milk in- 
dustry, and that it has been supplanted by a complex economic 
pattern of processes and relationships quite alien to "freedom of 
contract" and competition. Moreover, few if any of the participants 
in the industry want to return to the so-called "free market." If 
this is true, we are faced with the question of whether it is possible 
to maintain the essentials of economic democracy within that in- 
dustry. If we assume that the traditional free market with unlim- 
ited competition and laissez faire operations is the only form 
through which democratic processes are possible, we have fore- 
doomed the answer. But if the market conditions in this industry 
are such as to make it necessary for us to sacrifice the free market, 
it is imperative that we do everything we can to develop and apply 
alternative techniques and procedures calculated to maintain es- 
sential economic democracy, the minimal requirement of which is 
that discriminatory, oppressive treatment of any one group by 
another not be tolerated. And certainly, government regulation, 
intended to cure all evils, must not allow itself to be used as a 
primary instrument for such oppression. This poses the question 
of whether alternative techniques, practices, and procedures are 
available to assure these minimal requirements. 

"Cooperatives" Supported in Dairy Institute 

The central part of the theses presented by two specialists in the 
milk industry at the Dairy Institute held at Montana State College 



'"From personal interview with the Board's executive secretary, Oct. 5, 1960. 
Note that, implicitly, this proposition grants that it is price regulation that 
freezes the producer to his distributor. It should follow that the same regu- 
latory agency should have the responsibility for developing practices which 
make impossible coercion of any producer by any distributor. 

134 



in Bozeman in November 1960, stressed the fact that the producer 
is almost defenseless in his dealings with other members of the 
industry, and that he needs producer marketing cooperatives to 
place him in an economic position of equality. W. G. Sullivan, 
Assistant Director, Dairy Division, U. S. Agricultral Marketing 
Service, declared that: 174 

In the fluid milk industry equalizing bargaining power between 
producers and handlers is especially important. Dairy farmers 
produce a product which is highly perishable and unstorable. It 
must be delivered to market every day and, consequently, it is 
marketed within a highly organized and inflexible marketing system. 
. . . These circumstances make dairy farmers especially subject to 
short-run impositions and exploitations. They are thus especially 
in need of a program which helps them overcome an intrinsic lack 
of bargaining position. 

Here, Sullivan has stated in essence the bald economic fact on 
which all regulation of the milk industry is justified in the first 
place — the special, unique characteristics of the product and of the 
producers, which are supposed to permit the state to exercise its 
police powers, particularly in the producers' behalf, and conse- 
quentially, in behalf of the industry as a whole. In its declaration of 
policy, the Montana Act repeats over and over the theme that it is 
the unique character of the commodity itself, and of its source, 
which makes both producer and distributor especially susceptible 
to "those unfair, unjust, destructive, demoralizing and chaotic con- 
ditions and trade practices" requiring the exercise of the police 
power. And Sullivan affirms that one of the most effective instru- 
ments for protecting the producer in the market, under the Federal 
Marketing Act, is the producers' cooperative. He declares further 
that: 175 

. . . the orders [stabilizing prices] cannot operate satisfactorily in 
a vacuum. It takes other agencies to make the marketing system 
work. Strong cooperative associations of producers are particularly 
necessary to the satisfactory operation of a milk order program. . . . 
The cooperatives must help farmers solve numerous production 
problems which are essential to a satisfactory marketing situation. 
Without the help of an active cooperative association the order pro- 
gram will not attain its fullest benefits for producers, for handlers 
and for the public. 

Though the regulations provided for under the federal act differ 
greatly from those under most state acts, obviously producers' coops 
can be made equally effective under state laws. 

Professor Davidson thus described the need for and the probable 
development of producers' cooperative associations under the Mon- 
tana Milk Control Act: 170 



'"Sullivan, What Can Federal Orders Do to Solve the Pricing Problem? op. cit., 
supra, n. 128, at 91, 94. 
375 Id., 96. (Emphasis added.) 
17fi DAVIDSON, op. cit., supra, n. 128, at 15, 15-16. 

135 



Most producers are dependent on one of these distributors as a sole 
outlet for milk. To be a fluid milk producer requires special financial 
and other commitments for those who would qualify. . . . Once quali- 
fied, they become dependent ... on the continued acceptance of their 
product. With growth of surplus, the degree of dependence be- 
comes greater . . . [which] precludes shifts to other forms of pro- 
duction. These factors together with a growing volume of surplus 
provides [sic] the distributor with a powerful bargaining tool in 
the form of the ability to specify the conditions under which milk 
will be purchased. 

On the historical development of cooperatives, Davidson adds this: 177 

. . . with the failure of individual negotiations to produce satisfac- 
tion due to real or felt discrimination the growth of producer associa- 
tions began. The attitude builds among producers that their very 
survival is dependent on their ability to organize and share in the 
role of policy determination. ... In most markets, where producer 
organizations have become effective, several unsuccessful attempts 
preceded the forming of an organization capable of surviving in the 
face of opposition by distributors and apathy of producers. 

The present unhealthy practices carried on in some areas demand 
resolution. The producers have not shown the organizational strength 
yet to accomplish this. That they will do so, if history repeats itself, 
is only a matter of time, if during the conflict the market itself is 
not destroyed. . . . 

Professor Davidson also notes the recent pronounced trend in 
concentration and growth of distributor units, giving them rela- 
tively great increases in market dominance and power. 178 He points 
out, however, that with regulated prices the basic potential eco- 
nomic conflict between producer and distributor no longer exists — 
at least not naturally — and that it is in the latter's interest not to 
use coercive, discriminatory practices, but to work instead for the 
good will of all his producers. 179 He is sure that contented milk pro- 
ducers will benefit their distributors at least as much as contented 
cows will benefit their producer owners. 180 And, interestingly, Mr. 
Ralph J. Anderson, a distributor appearing on the same program 
with Davidson, apparently agrees with him on this point com- 
pletely, having this to say on the matter: lsl 

Disloyal and discontented producers in any area will affect sales. 
... I recommend that they [distributors] offer to the producers the 
opportunity to have auditors, of their own choice, audit the dis- 
tributors' books at any time. Also, I recommend that the State of 
Montana . . . audit distributor books frequently and report their 
findings to the people of Montana and especially the producer. Let's 
remove the veil of secrecy involving prices paid to producers in 
various areas of Montana and start working together to produce 
better quality products and sell more of the same. Producers who 
are treated respectfully will, for the most part, be loyal producers. 



177 Id., 16. 

ns Id., 15-16. 

' 7 ''Id., 19. 

^'Id., 20. 

,M ANDERSON, op. cit., supra, n. 128, at 12. (Emphasis added.) 

136 



At the very least, this procedure would dispel persistent suspicions 
that the distributor is grossly misusing his control over surplus 
with its depressed price. 

Specifically, just how would the producer's cooperative serve 
under the state control Act? The following discussion will suggest 
some of its particular uses. 

Producers' Cooperatives 

Two very important techniques recently developed and utilized 
extensively in some other socio-economic areas to maintain eco- 
nomic democracy are: 1. Negotiation and bargaining procedures to 
resolve differences between groups with apparently conflicting 
interests; 2. Arbitration of differences. These often are supple- 
menting procedures. 

Unfortunately stigmatized in the minds of some by their associa- 
tion with the labor-management field alone, these processes must 
be recognized as highly important techniques and procedures, de- 
veloped by a resolute society committed to the principles of democ- 
racy for the peaceful and equitable solution of differences of a great 
many kinds. For example, commercial arbitration has a highly 
successful history in the field of international business. Of course, 
one of the pre-conditions to the successful operation of these pro- 
cedures is that the persons involved be so organized for these 
purposes as to be more or less equal in their bargaining status. The 
oligopolist trend in recent years in the milk industry gives added 
weight to the view that the producers should combine for the pur- 
pose of negotiating with the distributors on a great number of 
different issues. This is where producers' associations may be of 
particular value. 

Understandably, the Montana Dairymen's Association included 
in its fourteen proposed regulations several proposing that the 
Association be used not only as a selling agent for its members, 
but also in a variety of other ways. As will be recalled, the Board 
has been granted the power to arbitrate differences between any 
and all parties in the milk industry. 182 This Association urges that 
it exercise those powers regularly, proposing that the Board arbi- 
trate two things specifically: 1. Re-allocation of relinquished base, 
"in the event that the plant and a majority of the producers are 
unable to reach an agreement ;" 183 2. The question of hauling rates 
when that is in dispute between a majority of producers and their 
hauler. 184 For itself, this Association proposed that it should negoti- 

1S:3 RCM 1947, section 27-405 (5), as amended. 

i88 Notice of Public Hearing, etc., supra, n. 112, Proposal No. 3, 11-12. This same 
Proposal proposes that the Board assume a considerably enlarged jurisdiction 
over "base" generally. 
^ M Id., Proposal No. 4. 

137 



ate with the distributors for the price to be set on surplus milk sup- 
plied by Grade A producers 185 and that it represent any member 
producer in good standing with the Association receiving notice 
from his distributor of an intention to down-grade or cut him off. 180 
The Board already has included the arbitration of hauling rates by 
it in some of its area price orders. 187 

ADDITIONAL "VITAL ISSUES" 

Our discussion so far has dealt with only three of the more 
fundamental issues involved in the administration of the Act: 1. 
Criteria for price setting; 2. Legal status of "base;" 3. Development 
of techniques, procedures, and practices to insure equality of treat- 
ment of all units in the industry. The man who has been most 
concerned with recognizing these questions and getting answers 
to them, at least since the 1959 amendments, is Mr. Jeff Brazier, 
the Board's legal counsel. In the address concluding the Milk Insti- 
tute held in Bozeman in November 1960, Mr. Brazier listed the 
following as "some of the most vital issues concerning the adminis- 
tration" of Montana's Milk Control Act (though not in the order 
given here): 188 

1. Authority to regulate producer marketing conditions such as base 
and pooling programs; 

2. Authority to establish special wholesale and retail prices for milk 
sold at farm and dairy stores; 

3. Authority to regulate price of manufacturing milk to producers; 

4. Price of milk to schools and institutions; 

5. Plant-to-plant prices; 

6. Authority to regulate Fair Trade practices among distributors; 

7. How to discourage interstate competition without burdening 
interstate commerce. 

First Issue — Base and Pooling 

We have considered the question of what legal character should 
be attributed to earned base. As noted, the Board already has 
asserted some authority in this matter. There may be some further 
question as to whether the earned base method of allocating plant 
needs should not be required. 

With regard to "pooling programs" for facilitating marketing by 
producers, however, the 1959 amendments may appear to make the 
law less certain, rather than more so. The present Act omits section 
27-419, which for twenty years formally expressed a very strong 
legislative policy favoring the marketing of milk by the producers 



^Id., Proposal No. 7. 

IMi Id., Proposal No. 10. 

IST See, for example: Official Price Order No. 60-1, Effective Oct. 1, 1960, for 

Market Area No. VI, Art. IV, section 1 (a) page 12. 

ls *Op. cit., supra, n. 1, at 101. 

138 



through producers' coops, and expressly approved "pooling," with 
payment by "blended prices" to the cooperatives' members. How- 
ever, there is nothing in the 1959 Act negativing the use of such 
coops, if the Board should decide that they are a necessary or 
desirable instrument in further stabilizing and developing healthy 
economic conditions in the milk industry. Such coops still are 
provided for and approved for all agriculture, in sections 14-401 
and following, and they also receive the strongest kind of approval 
under the federal Act. 

Second Issue — Pricing Standards 

Very possibly, the second question became much more obvious 
to the industry generally as the result of the Boylan case. 189 In our 
earlier discussion of this case, we considered parts of the Court's 
findings of fact and the judge's "preliminary observations" to illus- 
trate the near hopelessness of the situation which a producer may 
face if he is cut off by his distributor. But the central issue in that 
case was whether a farmer who processed and sold milk at his 
farm, without transporting or delivering it, was subject to an order 
which set prices for producers, producer-distributors, distributors, 
and retailers. 100 With considerable plausibility, defense counsel in- 
sisted that defendant Boylan was none of these. 101 The market area 
and the price order involved were established under the old Act, 
in 1957. Boylan's farmstead, where he sold the milk, was within 
that zone (which extended three miles beyond the city limits), 
though much of his farm was without, thus further complicating 
and confusing the issue. Apparently, in the course of the trial, the 
Board's executive secretary became convinced that, at the very 
least, Boylan's operation was entitled to a separate price schedule 
because of the special economies in his operation. At least he testi- 
fied that, "Official order No. 193 did not contemplate the type of 



L89 In June 8, 1960, correspondence, the Board's executive secretary states that 
Mr. Brazier "did not refer to the Boylan situation (in stating this vital 
issue), but rather to large super-markets, which are now demanding a special 
cash and carry price. Boylan's situation and similar operators affect only a 
small percentage of the milk sales . . . , but the super-markets could well 
affect up to 70% of such sales." But the fact is that both simply are varying 
illustrations of the same basic pricing problem. 

""'Montana Milk Control Board v. Boylan, District Court, 18th Judicial District, 
Gallatin County, File No. 14,207, Plaintiff's Proposed Conclusions of Law 
No. II, asserts, "That the defendant ... is guilty of violating a . . . regularly 
promulgated . . . order of the Montana Milk Control Board." Defendant's 
Proposed Conclusions of Law No. II, states, "That the . . . operations of the 
defendant as now being conducted was not considered by the Milk Control 
Board ... in promulgating Order No. 193." Ibid. 

VM Ibid., Defendant's Memoranda of Law, 6-7, based largely on the alleged 
definitions and usages of the various categories of "licensees" in the statute. 
This is not to suggest that the normal court would be likely to adopt this 
argument, but simply that the present statutory wording permits such argu- 
ment. 

139 



operations carried on by defendant Boylan." 192 Although the Court 
seemed to feel sure that the legislature must have intended to cover 
this defendant's type of operation, 193 it was equally sure that he was 
entitled to a special price hearing, for this kind of business, and 
so ordered the Board to hold such hearing. 194 In its final order, as 
amended, ldrj the Court left Boylan free to continue selling at his farm 
pending a Board hearing and further price order, which was sup- 
posed to be held very shortly, not later than March 28, I960. 190 A 
recent California case involving a related problem confirms at least 
the reasonableness of the view that Boylan's operation calls for a 
special price schedule. 197 Here, the administrative agency set a lower 
minimum price for milk bought at the distributor's plant than for 
that bought at a retail carry-out store. When this was challenged, 
the Court upheld the agency's power, noting that there probably 
was a substantial difference in the costs of the two operations. 198 
These cases raise the question of whether the Board should adopt 
a general practice of setting prices for every potential consumer 
outlet, particularly when one of the stated purposes of the Montana 
Act is "to make the distribution thereof between the producer 
and consumer as direct as can be efficiently and economically 
done. . . ." 199 

In spite of the Court order for a hearing, however, it does not 
appear that the Board has held any further price hearings for 



™ 2 Loc. cit., supra, n. 191, quoting from Transcript of Testimony, pages 42-43. 
Wi Op. cit., supra, n. 190, Court's Finding of Fact No. 14 and Conclusion of Law 
No.l. 

19i Id., Finding of Fact No. 7, and Conclusions of Law Nos. II and III. 
19v The defendant excepted to the Court's Conclusion of Law No. VI, enjoining 
him from continuing to sell milk at his farmstead, pending the Board hearing 
on minimum pricing for his particular kind of operation, pointing out that 
in its "observation No. 5," the Court itself had recognized the fact that the 
Board's executive secretary testified that "Official Order No. 193 did not 
contemplate the type of operations carried on by Defendant Boylan." Con- 
ceding the merit of this exception, the Court modified Conclusion of Law 
No. IV so as to limit the defendant in the future strictly to the manner of 
sale of milk practiced in the recent past — at his home, pending a "realign- 
ment" of the price schedule by the Board. 

'""Although the original decree ordered the Board to hold a further adminis- 
trative hearing "not later than the 16th day of March, 1960 (Conclusion of 
Law No. Ill), on February 22, 1960, the parties stipulated that such hearing 
might be delayed until March 28, 1960. This stipulation was filed on February 
23, 1960. 

1B7 Misasi v. Jacobsen, 3 Cal. Rptr. 849 (1960), Note, 12 HASTINGS LAW 
JOURNAL 316 (1961). 

19H Ibid., 12 HASTINGS LAW JOURNAL at 320. 

19!, RCM 1947, section 27-401 (f ). To the extent that there are obvious and com- 
putable differences in operating costs between different distribution prac- 
tices, those differences should be reflected in differing price schedules. This 
is the rationale of Misasi v. Jacobsen, supra, op. cit., n. 197. 12 HASTINGS 
LAW JOURNAL 316, 320 agrees. 

140 



Boylan's particular case.- 00 But in the new pricing orders for at least 
two market Areas, IV and VII, effective October 1, 1960, the Board 
has dealt with a "producer-at-farm" price, setting the per gallon 
price at $.65 (the price for which Boylan sold sterilized milk) for 
Area VII, and at $.43 per one-half gallon for Area IV.- 01 Bozeman 
is in Area I, where the price hearings have been delayed. 

Notwithstanding this special price schedule for farm sales, the 
Board may very possibly still have a lingering doubt as to whether 
such operations come under the Act, in any case, in view of the 
defendant's argument that the present Act, at least after 1959, does 
not, in its definition of terms, cover any farmer who sells his milk 
directly from his farm or dairy store on his farm, with customers 
coming there to buy. Arguably, none of the definitions found in 
RCM 27-403 covers this operator. Even to be a "producer," as there 
defined, one must not only produce the milk but also sell it at 
wholesale to a distributor. Thus, can the Board even compel this 
operator to buy a license? Further legislation may be necessary to 
clarify this problem. The writer understands that Mr. Boylan is 
still selling his milk from his farm, awaiting a price order. 

Another point of interest in the Boylan case was raised by the 
Board's further contention that it had no duty to intercede in or to 
try to resolve any kind of dispute between a producer and his 
distributor, and that perhaps it would exceed its jurisdiction in 
doing so. The dispute between Boylan and the distributor for the 
coop, of which he was a member, allegedly concerned claims that 
the coop was overcharging Boylan for transportation and that it 
was charging him for advertising, both of which, apparently, the 
coop denied. 202 There may be some question, however, as to the 



a "'In recent correspondence, the Board's executive secretary explains that the 
Board understood that the Court's order in the Boylan case directed them to 
review the price structure in Area I, generally, and that they were engaged 
in that administrative proceeding when they were enjoined in the Dillon 
case, which led to the Supreme Court's decision in State v. District Court, 
5th Judicial District, —Mont. — , 355 P2d 664, upholding the legality of the 
Board's action in that price hearing. A new area market order has not yet 
been issued for Area I (Bozeman). 

-"'Official Order No. 60-4, Effective Oct. 1, 1960, Art. IV, section 1, page 4, and 
Official Order No. 60-8, Effective Oct. 1, 1960, Art. IV, section 1, page 4. 

■"-In June 8, 1961, correspondence, the Board explains its position with regard 
to Boylan's complaints, on the ground that, "The penalty imposed upon 
(Boylan) . . . was an internal matter concerning the owners of a business 
of which he was one. . . . The . . . Board had no authority to enter into 
such a controversy. . . . These cooperative (s) . . . historically have devel- 
oped and enforced rules . . . among their patrons, . . . and such matters 
are considered beyond the scope of milk control regulation." The "penalty" 
referred to reportedly was imposed over a dispute involving the coop's 
"quality standards." But any general examination of the current and pros- 
pective relationships between producer and distributor, which may well be 
called for, should include a reconsideration of the Board's jurisdiction in 
such case. Incidentally, the Court's Finding of Fact No. 13, stated that the 
defendant had complied with all public health laws and the Montana Live- 

141 



degree of conviction with which the Board advanced this argument, 
in view of the clear provision in the Act from its inception that, 
"The Board may act as mediator or arbitrator to settle any contro- 
versy or issue pertaining to fluid milk among or between" 20 "' any 
groups in the industry. At any rate, another of the vital issues 
listed by the Board's legal counsel strongly suggests that the ad- 
ministrator is quite aware of that provision now. 204 And, in the 
Boylan case, the Court said that the Board should have acted on 
its own initiative in holding further price hearings on Boylan's 
operation. 20 " 1 In this connection, a theme stated at least twice by 
Mr. Brazier in his November address is of particular interest: 200 

One difficulty that your Board has had in administering the relevant 
Milk Control Law and rules promulgated thereunder is convincing 
parties dissatisfied with parts of orders that they have remedies of 
applying to the Board for a public hearing to amend the unsatis- 
factory order (rather than violating orders). 

Third Issue — Pricing "Excess" 

On the third "vital issue," the Act says nothing about the setting 
of prices either on "surplus," or "excess," or "manufacturing milk" 
for the producers. Here the distributor holds a real whip hand, and 
some of the most serious charges against him involve the alleged 
manipulation of quotas so as to permit the classing and pricing of 
considerable amounts of Grade A milk as surplus. That is one of 
the reasons for so much insistence on the strictest possible account- 
ability by the distributor for his use of the milk he buys. Pro- 
ducers' coops, if they develop and if their right to negotiate for 
these prices comes to be recognized, could probably perform a valu- 
able service for their members in this regard. 

Fourth Issue — Schools and Institutions 

An interesting contrast exists between the Unfair Practices Act 
and the Milk Control Act as to the status under each of govern- 



stock Sanitary Board and County Board of Health regulations. Op. cit., 
supra, n. 190. 

^RCM 1947, section 27-405 (5). 

-"'Several of the current area market orders contain a provision that the Board 
will arbitrate hauling charges when a dispute concerning them arises. See 
Official Order No. 60-1, Area No. VI, Art. IV, section 1 (a), page 12. 
afi In June 8, 1961, correspondence, the Board's executive secretary comments 
on this thus: "The Court failed to distinguish between the relationship of 
a cooperative and its members and an independent corporation buying milk 
from individual producers." Very possibly, the Court felt that the facts 
demonstrate the unsoundness of the distinction. In its Proposed Findings of 
Fact and Conclusions of Law, in the Boylan case, the plaintiff included no 
proposal based on or suggesting this distinction. 

Jim Op. cit., supra, n. 1, at 100-101. On page 100, the author also says, that, "An 
additional form of relief under either federal or Montana control which has 
been ignored by the industry . . . until recently, is an application to amend an 
official order." 

142 



mental agencies as consumers. The former expressly exempts sales 
to them from its operation; 207 the latter, as amended, not only gives 
no such exemption, but expressly prohibits, as an unfair practice, 
the slightest reduction below the fixed producer prices on milk, 
"distributed to any person, including agencies of the federal, state 
or local government." 208 Moreover, treating institutional purchasers 
as wholesale buyers, it orders the Board to fix, "The minimum 
wholesale prices . . . for milk . . . when sold ... to retail stores, 
restaurants, boarding houses, fraternities, . . . public and private 
schools . . . and both public and private institutions. . . ," 209 The 
Board interprets this as not requiring a single wholesale price for 
all the named purchasers and sets a special price for schools in 
several of its current orders, 210 as given below. Prior to this express 
coverage of government agencies by the 1959 amendments, it might 
have been argued that their exemption under the Unfair Practices 
Act should extend to the purchase of dairy products. These amend- 
ments settled that. But it did not settle the question of price dif- 
ferentials for volume sales and deliveries. The Board has included 
special school prices in at least six of its current pricing orders, 
ranging from five and one-half cents in Area IV and six cents in 
Area VIII to six and one-half cents in Areas III, V, VI, and VII. 
Apparently, the Board has left it up to the distributor to ask for a 
hearing on special pricing to schools. None was asked for in Area X 
in the 1960 hearing, though a distributor may have suggested the 
issue. 

Following that hearing, the Board filed a complaint against cer- 
tain Missoula distributors, charging them with violating the mini- 
mum price of seven cents per one-half pint container by selling 
such containers at five and one-half cents to a certain school dis- 
trict in Missoula County. 211 (Some school districts paid six cents 
during the same period.) 212 A consequence of this suit would have 
been to provide a hearing on the matter. However, shortly after 



^RCM 1947, section 51-107 (e). 

L " IV LAWS OF MONTANA 1959, Ch. 192, section 5, amending RCM 1947, section 
27-407 (b), directs the Board to fix wholesale prices, defining "wholesaler" to 
include public and private institutions of all kinds. Id., section 8, amending 
RCM 1947, section 27-414 (e), makes it an unfair trade practice to pay pro- 
ducer less than minimum price for any milk to be distributed "to any person, 
including agencies of the state or local government." 

L " K, LAWS OF MONTANA 1959, Ch. 192, section 5, amending RCM 1947, section 
27-407 (b). 

- ,u For Market Area No. IV, Official Order No. 60-8, Art. IV, section 1, sets the 
school price at 5% cents, one cent less than the regular price per one-half 
pint; in Areas V, VI, VII, the price differential is one-half cent — 6V2 cents 
compared with 7 cents. 

-" As reported in the DAILY MISSOULIAN. 

-'-The contract price to the Missoula County High School for the school year 
1960-61 was 6 cents, compared with regular wholesale at 7 cents. 

143 



January 1, 1961, this case was dismissed by the trial judge for 
reasons which are unknown to the writer. 213 

Undoubtedly the question of quantity prices to institutions poses 
some special problems which the administrator apparently feels 
have not been satisfactorily worked out as yet, even if it be assumed 
that such institutions should be subject to the Act. To the admin- 
istrator who is obligated to regulate prices so as to "best protect 
the milk industry in the state. . . ," however, any rule reducing 
the volume of consumption of Grade A milk at standard prices 
weakens the industry. The percentage of the total fluid milk con- 
sumed by public institutions is large enough to adversely affect the 
industry if the institutions were allowed to buy it at surplus prices. 
Hence, the administrator may be expected to approve the inclusion 
of public institutions under the Act. But this should not preclude 
an enlightened policy in computing economies from volume han- 
dling. 

Fifth Issue — Plant-to-Plant Prices 

One of the practical questions relating to plant-to-plant prices is, 
"Who should have to sustain the cost of the added transporation?" 
The recent Heimbichner case ruled that 214 although the producer 
could not be compelled to pay for such transportation, the Board 
could authorize the distributor to seek a written consent from his 
producers to share in such cost; and it ruled further that such 
Board policy was consistent with an earlier Attorney General's 
opinion saying 215 that the producer could not be so required to pay. 
However, in a number of 1960 price orders, in dealing with milk 
disposed by a distributor in one area to one in another area, the 
Board expressly provides that the producer shall receive the prices 
provided for Grade A milk, "less the cost of transporting such milk 
at average tanker rates from the plant which originally received 
such milk to the plant where it is ultimately used, and the (first) 
distributor shall be compensated at a rate not less than 102% of 
cost." 210 Such transfer within the area is priced at "102 % of regular 

- ly In June 8, 1961, correspondence, the Board states that this dismissal has been 
appealed, but see infra text at note 248. 

^Heimbichner v. Montana Milk Control Board, —Mont.—, 332 P 2d 922 
(1958). The issue raised in this case, and that considered in the relevant 
Attorney General's opinion, 23 ATTORNEY GENERAL'S OPINIONS, NO. 18 
(1949-50), involves the legality of entering into an arrangement with the 
producers whereby they share in the transportation of processed and pack- 
aged milk on a voluntary basis, where it appears to be to their advantage. 
Hence, the regulations dealing with transportation in current orders are not 
supposed to involve the same issues — Heimbichner is not involved. 

as Cited, supra, n. 214. 

-'"Illustrative of several such orders is Official Order No. 60-7, for Market 
Area No. IV, Art. V, section 1 (d). However, again illustrative, in the same 
Order, Art. IV, section 1 (b), provides that, "No deductions for the cost of 
transporting milk ... in finished packaged products . . . may be made from 

144 



producer price." 1 ' 17 Apparently, this treats the first plant as a stop- 
over or way-station in a delivery from producer to the second plant, 
with the first plant receiving pay for its part in that transport. 
The Board also may be acting under section 27-407 (a), paragraph 
three, which says that: "No allowance for freight (except farm to 
plant) shall be charged to a producer . . . unless it is found . . . 
that such an additional freight allowance is necessary to permit 
the movement of milk in the public interest." 

Sixth Issue — Unfair Trade Practices 

Whatever the Board's troubles in administering section 27-414, 
the fair trade practices section, very clearly it has extremely broad 
authority to prohibit any and all kinds of practices calculated to 
evade the strictest compliance with the minimum prices set. Orig- 
inally limited to the regulation of unfair practices among Board 
licensees, 218 this section was amended to include such regulation 
between Board licensees and the general public.- 1 '' 

One of the Board's early official acts following the 1959 amend- 
ments was to adopt an order, effective July 1, 1959, detailing certain 
"rules of fair trade." 220 These rules prohibited contests to secure 
business, except among employed salesmen; 221 the placing of any 
extraordinary value on any part of containers for refund; 222 pro- 
viding any kind of facility to display, sell, or store dairy products 
at less than cost; 22 ' 5 the leasing, giving, loaning, or the use by a 
licensee of any equipment at less than a reasonable rental; 224 or any 
advertising of an intent to violate any Milk Control Law or regu- 
lation. In addition, the Board also outlawed the giving of trading 
stamps with the sale of fluid milk by retailers, 22 -"' because this would 
amount to approximately a two percent reduction in the retail 
price. The Montana Trade Commission was unable to enforce a 
similar rule, or to limit the use of stamps effectively, simply be- 
cause it could not stipulate what would amount to a below cost 

the amount due producers regardless of where such products are marketed." 

Query: Does the Board intend to abandon its permissive rule involved in the 

Heimbichner case? Or is such deduction still allowed on a strictly voluntary 

basis? 

- [7 Id., Art. V, section 2. 

- JH RCM 1947, section 27-414, as enacted in Laws, 1939, Ch. 204, section 14. 
21,I LAWS OF MONTANA 1959, Ch. 192, section 8. 

^Official Order No. 59-1: Rules of Fair Trade, approved May 29, 1959. 
JJl Ibid., Rule 1 (a). 
-Id., Rule 1 (b). 
™Id., Rule 2. 
"'Id., Rule 3. 
""Grocery stores giving trading stamps generally have long been required to 

exclude all fluid dairy products from the sales on which stamps are given. 

However, the official order on which this rule is based is not available to 

the writer. 

145 



sale; but the Milk Control Board is not faced with that difficulty, 
since it sets the retail minimum. 

Seventh Issue — Interstate Competition 

Problem number seven is framed in recognition of Montana's 
duty to admit all products entering it from interstate commerce. 
The state is not in a position to regulate producer prices for such 
milk, which is very likely to be subject either to the Milk Control 
Act of another state, or to a federal pricing order (where exported 
from a federal market area) which attempts to regulate only pro- 
ducers.-- But this seventh vital issue, troubling the Act's legal 
counsel, does throw into bold relief the extent to which those 
responsible for the Act's administration abhor anything remotely 
resembling competition within the boundaries of the state, where 
the Board is expected to maintain a strict schedule of administered 
prices. 

It hardly is to be doubted that any substantial amount of compe- 
tition from the outside would cause the Board to lost control of the 
milk industry. The Board's concern makes clear its understanding 
that its responsibility under the Act can be properly discharged 
only by maintaining the strictest and most complete control pos- 
sible over the determination of milk prices. At the same time, it 
is faced with the basic legal fact that Montana cannot constitu- 
tionally exclude milk entering the state in interstate commerce. 
Attempts to exclude by imposing burdensome, technical quality 
standards recently have been struck down by the Courts. 227 The 
problem thus presents the Board with the horns of a dilemma, with 
little basis on which to choose between them. It is faced with the 
extremely difficult task of maintaining a tightly closed market, 
de facto, by administering prices, in spite of the political and legal 
requirements that it remain open at all times — a feat becoming 
increasingly difficult with the technological changes in the process- 
ing and transporting of milk which will make national distribution 
of Grade A milk feasible in the foreseeable future. 

The Board must tread a narrow line on pricing, taking into full 
account the prices existing in adjoining areas, as the Act dictates, 
to avoid importation in any volume, and at the same time providing 
a sufficiently high schedule to keep the Montana dairy industry 
strong and healthy. 

We have epitomized here the state of the milk industry and 
market in Montana in the year 1961 and for the foreseeable future 



-"'Sullivan, What Can Federal Orders Do to Solve the Pricing Problem?, op. 
cit., supra, n. 128, at 96. 

- 7 Dean Milk Co. v. Madison, 340 U. S. 349, 95 L Ed 329 (1951); Id. v. Aurora, 
404 111. 331, 88 NE2d. 827 (1949); La Franchi v. Santa Rosa, 8 Cal2d. 331, 
65P2d. 1301 (1937). 

146 






— at least unless the Code section regarding cooperation with the 
federal government and the problem it poses force a modification 
in our Act's traditional administration. 

STATE-FEDERAL COOPERATION 

Mr. Brazier does not mention the problem of implementing that 
section, which is section 27-421, RCM 1947, providing that our Board 
shall cooperate with the federal government on milk control, and 
to that end empowering the Board to conduct joint hearings and 
issue joint or concurrent orders.-* Although it is allied with this 
vital issue number seven, it does not appear to be a currently active 
problem, since at present no federal milk orders extend into Mon- 
tana.- 29 Should such extension occur, however, the Board will be 
faced with a very real problem if it should want to act under this 
section, because the federal administrator can cooperate under 
law only with those state agencies administering a price schedule 
based on a formula computed from prices for milk products set by 
a competitive market. Presumably, such cooperation would be im- 
possible in Montana so long as present pricing policies continue. 
Further, though the Montana Board would have the power to regu- 
late the wholesale and retail price of such milk, the writer under- 
stands that the policy of the Agricultural Marketing Service gen- 
erally has been to require the state to forego further price contro 1 
in the area affected as a condition to issuing a federal market order. 
In view of the Board's prime concern with keeping out all forms 
of competition, such change does not seem likely. But possibly, as 
suggested already, it feels that it has little choice in pricing prac- 
tices under the present expressed policies of the Milk Code. But 
just possibly, also, this situation raises the question of whether 
Montana should review that policy of rigid price control at all 
levels. 

FEDERAL ORDERS 

Those most familiar with market conditions under the federal 
Act seem to feel that it maintains reasonably satisfactory market 
conditions; 230 that the objectives of providing orderly marketing 

228 RCM 1947, section 27-421. 

""As a matter of practical administration, generally, interested producers have 
to ask the Department of Agriculture to hold a hearing to demonstrate the 
need for a market order, to give effect to the stated federal policy of stabiliz- 
ing prices at a reasonable level, before the Dairy Division will even investi- 
gate the need therefor. If, preliminarily, it appears that an order might be 
helpful in establishing an orderly market, notice of a public hearing is issued. 
Sullivan, op. cit., supra, n. 174, at 93. 7 U.S.C.A., section 608c (5) (B) (i), 
requires an approving vote of three-fourths of producers affected. So, as 
administrative practice, there is good reason for requiring that the proposal 
for a market order originate with them. 

^"Sullivan, Methods of Pricing Inter-Market Shipments of Milk, op. cit., supra, 
n. 174, at 77; Sullivan, op. cit., supra, n. 174, at 91. 

147 



conditions and substantial economic stability for the producer and 
at the same time maintaining considerable flexibility in the market 
generally are, by and large, achieved. If this is true, it is especially 
noteworthy in view of the fact that it is based on a degree of self- 
determination which the Montana Act had until 1959, but no longer 
allows. Under the federal Act, not only must there be a showing 
that interstate commerce is affected by the marketing conditions 
in a given area, but the decision that it should be regulated must 
originate with the producers, and any proposed order must be 
approved by either a two-thirds or a three-fourths majority of the 
producers supplying milk for that area before it can be put into 
effect. Other things being equal, a regular program based on self 
determination should be preferred over one determined exclusively 
by a government agency — at least, so far as the industry itself is 
concerned. 

REVIEW OF POLICY 

Processing and distributing facilities are developing and changing 
very rapidly; to meet the resulting problems, might there be prom- 
ise in a legislative program which would encourage the entry of 
federal administration into the state? State regulation and pricing 
could be geared to that federal administration where it exists, with 
the Montana Milk Control Board regulating the remainder of the 
state in such way as to coordinate those areas with the federally 
controlled areas. This would re-introduce some degree of flexibility 
and competition within the industry. Moreover, the claim 231 that 
marketing practices may be more readily adapted under federal 
orders to technological developments in processing and marketing 
of fluid milk than under the inflexible Milk Control Acts of most 
states is certainly plausible. 

One of the principal administrators of the milk marketing orders 
claims that regulating producer prices is all that is necessary to 
remove competitive inequalities, not only between producers, but 
also between handlers; 28 - that this is all that is needed to eliminate 
cut throat competition. At the same time, this administrator grants 



""Cook, Principles and Formulas for Pricing of Milk, op. cit., supra, n. 174, 
at 67, 75. 

L ' :!J Sullivan, op. cit., supra, n. 174, at 95. Apparently, a number of states 
once regulating all prices from producer to consumer, in the milk industry, 
have abandoned the fixing of consumer prices (approximating the federal 
practice). In a recent study, Professor Roland Bartlett, Professor of Agri- 
cultural Economics, University of Illinois College of Agriculture, states that, 
"Restoration of competition in the eleven or twelve states that still have state 
control of consumer prices might well mean the end of this type of control." 
Bartlett, Trade Barriers in Milk Distribution, in TRADE BARRIERS IN 
MILK DISTRIBUTION, UNIVERSITY OF ILLINOIS AGRICULTURAL 
INDUSTRIES FORUM, (Feb. 3, 1960) 42. 

148 



that federal orders do not solve all problems. He mentions particu- 
larly two of the principal ones-' 5 ' 5 inherent in Montana's Act. He 
declares that: 

1. The administrator cannot even attempt to adopt a price schedule 
based on the cost accountant's computation of cost of production, or 
according to what the producer considers fair. 

2. While the federal orders greatly facilitate acceptance by handlers 
of all milk offered them by producers, it cannot require the former 
to take all milk from any particular producer, or in any particular 
quantity; thus it cannot guarantee a market for producers' milk. 

Very possibly these are more nearly realizable objectives under the 
completely rigid controls which Montana now has — even though 
their price may be very high. 

In some respects, at least, federal orders are now influencing 
Montana's present administration. The Board is carefully using 
federal hearing procedures as models for state hearings, as a stand- 
ard for determining adequacy. 234 Moreover, its policies regarding 
base may reflect federal practices. The federal market order for 
the "Inland Empire" (Spokane) Market Area, effective October 1, 
1957, permits the transfer of base, as computed under the order, 
with the good faith leasing or selling of an entire herd. 235 The pro- 
vision for base transfer, contained in a number of current area 
price orders in Montana, is quite similar to that in this federal 
pricing order. 23 " 

Suffice it to say, for the present, that economic and technological 
conditions in the milk industry have changed and developed 287 over 
the past twenty-five years so that a fundamental re-examination 
of Montana's policy toward the milk industry may be needed. Fur- 
ther, even if it be assumed that regulation is necessary, a thorough- 
going re-examination of the objectives and policies guiding that 
regulation may be in order. And finally, the record of experience 
in administering the policies and practices of the federal Act may 
provide helpful guides in any review of the adequacy of the Mon- 
tana law and its administration. 



- M Ibid. 

-""The Area X hearing, held in Missoula in August-September, 1960, exempli- 
fied this statement. 

^Federal Marketing Order No. 108, as amended, Effective Oct. 1, 1957: 
Regulating the Handling of Milk in the Inland Empire Marketing Area, section 
1008.61 (a). This right to transfer "base" is limited strictly to "bona fide" 
transfers of an entire herd. It is important also, to note that under federal 
orders, the market area administrator determines and regulates these pro- 
duction quotas called "base." 

- :! "For example, Official Order No. 60-7, Market Area IV, Art. Ill, section 3 
(d),p. 11. 

2 ' i7 Cook, Inter-Regional Competition in Market Milk, op. cit., supra, n. 174, at 
21; Ward, op. cit., supra, n. 147, 16-28, 49-90. 



149 



1963 ADDENDUM 
Recent Litigation 

Since the above was written about two years ago, a considerable 
body of rather wide-ranging litigation has developed under the 
Montana Milk Control Act, challenging both the reasonableness of 
some of the market orders issued, effective in 1961, and the consti- 
tutionality of the Act itself, as well as the scope of the Board's 
administrative powers thereunder. 

Following the issuing of pricing orders for market Areas I, IX, 
X, and XI, in 1961, three identical suits were filed on behalf of the 
producers, 2 -' 5 * challenging both the adequacy of the producer prices 
set and the reasonableness of establishing the same basic price for 
each of the four areas. In spite of the fact that the typical butterfat 
production varied substantially in these areas, the Board selected 
3.5 percent butterfat as the basic pricing point for all four areas. 
Further, in Area X, though the producers had asked for a thirty-six 
cent raise to $5.71 per cwt. of milk with 3.7 percent butterfat, the 
order set the price at $5.25 for Class I milk — ten cents less than the 
old price. The Board did, however, establish the same base price 
for Class I milk and Class II milk. The latter had been much less in 
price. Reportedly,- 30 this increased the blend price approximately 
twenty-five cents per cwt. In the three suits, counsel stipulated 
that requests for additional hearings should be made. These hear- 
ings were in abeyance for some time, awaiting the development of 
a pricing formula which will be discussed below. 

In the northern and eastern parts of the state, the original market 
area orders, conforming Areas IV, V, and VI to their original boun- 
daries, were found to be unsatisfactory and, following further 
special hearings and conferences, marketing areas "representative 
of the marketing patterns of the areas involved, with price adjust- 
ments for special conditions" were set up, which was quite satis- 
factory to everybody concerned.- 40 

Other portions of the pricing orders also have been attacked in 
a consumer's suit,- 41 a retailer's suit, and in an attack on both the 
wholesale and retail prices of gallon jugs of milk. 24 - Moreover, the 
Montana Supreme Court had decided three additional cases, all of 
them further strengthening the power of the Board to enforce the 
Act. And one of them, indeed, is a landmark decision formally 



- as This information is contained in a letter from the Board's executive secre- 
tary, dated December 21, 1961. 
-"''Similar letter, dated December 5, 1963. 
2in Supra, n. 238. 

- u Ibid. Continuation of case cited supra, n. 102. 
- i2 Supra, n. 238. 

150 



upholding the constitutionality of the Milk Control Act for the 
first time. 

This last case, Montana Milk Control Board v. Rehberg, 24 * followed 
the reasoning of the Nebbia case, that prices may be controlled by 
the state, when the subject matter is sufficiently affected with a 
public interest, in the name of its police power and that milk pro- 
duction is a proper field for such regulation. It also declared that 
there was no improper "delegation of price fixing" here and that 
adequate standards were provided for the Board in setting milk 
prices. And, almost as important, in support of the more effective 
administration and enforcement of the Act, was the Court's further 
ruling that the Board could enforce its orders by securing an in- 
junction requiring compliance therewith. 

In Montana Milk Control Board v. Martin Maier, 244 the Supreme 
Court approves and makes available three different sanctions for 
enforcing the provisions of the Act imposing license fees on the 
milk industry: 1. By revocation of licenses;- 4 "' 2. By criminal ac- 
tion; 24 " 3. By civil action in debt. 247 The Board feels that this case 
further strengthens their hand substantially in enforcing the Act. 

In Montana Milk Control Board v. Community Creamery, etc., 24 * 
the Supreme Court considers for the first time the jurisdiction of 
the Board to set minimum prices to public institutions, such as the 
public schools. It also has to interpret section 27-414, directing the 
Board to formulate rules regulating "fair trade practices." On the 
question of minimum prices to schools, ruling for the defendants 
on sales prior to 1959, the Court declares that, prior to the 1959 
amendments, schools were not considered as "consumers" as de- 
fined by the Act. Since the schools clearly were not "distributors" 
or "dealers," they were not covered by the Act at all, at that time; 
hence the defendants were not guilty of violating the Act in selling 
one-half pint cartons to schools at five and one-half cents, even 
though the Board had set a seven cent minimum thereon. By the 
strongest implication, however, after the 1959 amendments, 249 the 
Act expressly covers sales to public schools, so any sale below the 
set price would be unlawful. 

On the second point, the Court rules that the defendant could 

-^_ Monti _ 376 P 2d 508 (1962). 
244 140 Mont. 38, 367 P 2d 305 (1962). 
^'RCM 1947, section 27-409, as amended by LAWS OF MONTANA 1963, Ch. 

147, section 157. This section actually states that "licenses thereupon (failure 

to pay fees when due) automatically terminates. . . ." 
- 4H RCM 1947, section 27-422. 
247 RCM 1947, section 27-424. 
24S 139 Mont. 523, 366 P 2d 151 (1961). This is the case discussed on pages 143 

and 144 above at notes 211-12-13. 

L4! 'RCM 1947, section 27-409 (b), as amended by LAWS OF MONTANA 1959, 

Ch. 192, section 5. 

151 



be guilty of a fair trade violation only under a lawfully promul- 
gated set of rules enacted by the Board, regulating fair trade prac- 
tices in full detail; that the fair trade regulations existing at the time 
of the suit were not so detailed, and hence, were not enforceable. 250 
So, the defendant was not guilty of the charge of violating. Here 
again, the Board can easily satisfy the Court's requirements in its 
future "fair trade" orders. 

Formula Pricing 

It will be recalled that the Board's administrative officers had 
become interested in having a pricing formula developed for use 
in Montana, at least as early as in 1960, stimulated in considerable 
part, no doubt, by the work of Professor Ward, who had been study- 
ing the problem since the mid-fifties. 2 "' 1 Having revised consider- 
ably his approach to the question of what business index items 
should be included in such a formula from that advanced originally 
in his doctor's thesis, Ward presented his revised views to Board 
members and its executive secretary. He also discussed his pro- 
posal with various other economists and otherwise interested per- 
sons. 252 In May 1962, Ward formalized his proposals with accom- 
panying formula, and with substantial analysis and explanation, in 
a Montana State College Bulletin. 253 

As set forth there, the formula contains three principal com- 
ponents: 1. Direct cost items, including (a) mixed dairy feeds, (b) 
hay, and (c) farm labor; 2. "Opportunity" costs, measured by rela- 
tive costs of other forms of farm production, resulting in the same 
income; 3. Consumer purchasing power, measured by (a) annual 
per capita income, (b) weekly wages, and (c) bank debits. 254 The 
formula components are weighted in the resulting index, so as to 
give a weighted value of 65 percent to all the cost items, i.e., direct 
cost and opportunity cost items, and 35 percent for those factors 
which deal with consumer purchasing power. 255 This is consistent 
with the relative weighting of these factors in the Act itself, in 
describing the various facts which the Board should take into ac- 
count as a basis for setting prices. The prices existing at the time 
formula pricing is adopted will be used "as a starting set of prices," 
as suggested by Ward. 25 " 

Late in the summer of 1962, the Lower Yellowstone Producers 



-"139 Mont, at 527-8; 366 P 2d at 153-4. 
-''Supra, n. 147. 

252 Ward, PRICING FORMULA FOR MONTANA MILK, Acknowledgements, 
15 (Montana State College Bulletin 569). 
■ Jr *lbid. 

*'*Id., pages 6-8. 
2:i5 Id., 6. 
■ J ™Id., 5. 

152 



Association petitioned the Milk Control Board for a hearing on a 
proposed amendment to the existing price orders of the two areas 
it represented, Areas III and V, providing for the incorporation of 
Professor Ward's formula into the official order. The hearing was 
held and the order was issued, to become effective April 1, 1963. 
In these two areas there have been two price changes since that 
time, one downward and one upward. 2 " From this development, 
it is apparent that, though the Board's executive secretary formerly 
had some doubts whether formula pricing would be possible under 
existing legislation, 258 the Board now considers the above action 
compatible with that legislation. One interesting point in the pro- 
visions of the actual order, however, is that it provides that price 
changes shall be computed by whichever is the lower of two alter- 
nate formulae. The second one described in the amended order is, 
"the hundred weight value of Class I milk announced for the most 
current month by the market administrator of Federal Market 
Order Number 75 . . . plus fifty cents . . . per hundred weight. . . ." 25 ° 

Apparently, other marketing areas are marking time with respect 
to requesting application of the formula, to determine how it 
works. The Board has shown no inclination, so far, to apply it on 
its own initiative, though its executive secretary assumes that such 
action would be proper. 200 

The Board also grants that some experimentation with the 
formula is desirable, to determine whether its present components 
are the most satisfactory. The executive secretary even suggests 
that other marketing areas might wish to formulate their own 
index. In short, its use at present is highly experimental and 
tentative, as it should be. 

There has been a little talk about working out a formula for 
retail and wholesale prices, but there does not appear to have been 
much done with the idea so far. Almost certainly all interested 
parties will prefer to profit from much further experience with 
the principle at the producer level. 

"Base" Again 

A casual analysis of the experience of Idaho in regulating the 
milk industry, compared with that in Montana, poses this inter- 

L ' ,7 This information is given in a letter from the Board's executive secretary, 
dated December 5, 1963. 

-'"Text supra at n. 145. 

-'"State of Montana Milk Control Board, Official Order No. 624, Amending 
Official Order No. 60-9, approved Oct. 27, 1962; posted Apr. 1, 1963; effective 
May 1, 1963. 

- (!<l Of course, as we have stressed above, as much as possible of all govern- 
mental administration should be executed through cooperative procedures. 
That approach here has the additional advantage of making it less likely 
that anyone will question the incorporation of pricing formulae into a pricing 
order, to take effect prospectively. 

153 



esting question: Is the imposing of fixed minimum prices on the 
industry a major cause for the reduction or elimination of alter- 
native distributor outlets for the producer (which results in the 
permanent subservience of producer groups to their respective 
distributors, tied together by the development of the principle of 
"base" production) ? I had supposed this was the case. However, I 
understand that much the same kind of permanent forced relation- 
ship resulting from the elimination of alternative competitive out- 
lets has occurred in Idaho, though their statutes do not provide 
for "administered prices." Their industry is tightly regulated and 
supervised otherwise, however. 201 

Complicating the problem further is the apparent fact that there 
are some milk markets in which a substantial amount of compe- 
tition among the distributors for the producers' product still sur- 
vives. Presumably, any combination of factors eliminating effec- 
tive competition for milk among the distributors would have the 
same effect — whether it resulted from strict government control 
or was the result of informal action among the distributors them- 
selves. This much still seems reasonably clear, however. The addi- 
tion to any market of the factor of rigid price control under strict 
administrative supervision, regulating the industry much as any 
public utility, surely will be at least a significant contributing factor 
in facilitating the development and maintenance of the tenurial 
relationship between the producer and his distributor. 

Conclusion 

Recently, a reviewer of this study for the Small Business Admin- 
istration, asked why so much time and space in it was devoted to 
the Milk Control Act administration. He suggested that it was 
essentially "agricultural" in character, rather than "business" or 
"industrial," as characterized by federal agencies generally. For 
any other reader who may be disposed to ask the same question, 
the answer I made to that reviewer should be equally responsive. 
It is as follows: 

If one uses the organization of federal administrative areas as a 
guide, it is not too surprising to find one maintaining that milk 
production should be classified as "agricultural" rather than indus- 
trial. In the original production of the raw milk itself, on the farm, 
obviously the product originates as an agricultural product. But I 
suspect that one immediately fails to distinguish between the funda- 
mentally different scope of price regulation under a federal market 
order from that under our state Act. The former purports to do no 
more than regulate the producer's price. On the other hand, our 
state Act regulates the entire industry, from production to con- 



'7 Idaho Code 1947, Title 37, Chapters 3-14. 

154 



sumption. By any standard, the major proportion of this market is 
in "trade." 

In an early Attorney General's opinion under our Unfair Practices 
Act, a very acceptable definition was given, to determine whether 
"butter" should be classified under that Act as "agricultural" or 
"manufactured." Ruling it was a manufactured product, the opinion 
stated that, "the answer . . . turns on the matter of the intervention 
of a processing between the natural product of the soil, and the 
final product for the consumer. . . ." See note 46 a , page 27, of the 
study. 

Moreover, since dairy products make up a major part of retail 
grocery stores' sales, it must be so classified for that reason. A 
leading local chain store informs me that fluid milk makes up 
5-6 percent of its sales and that dairy products generally total about 
11 percent of its sales. This is exactly the same field as is regulated 
by the Unfair Practices Act. 

However, there is a more compelling reason yet for making as 
penetrating a study of the Milk Control Act's administration in 
Montana as is possible. It is here, and here only, that we find the 
fullest implications of rigid price control fully revealed, demon- 
strating the profoundness of its impact on our economi-social struc- 
ture. For one especially interested in all significant developments 
revealing the interaction of the law with other social sciences, and 
of the former's influence on institutional changes, the Milk Control 
Act is the piece of legislation with the most meaning. For that 
reason, its importance hardly can be overemphasized. 



262 A news item in THE WALL STREET JOURNAL for March 23, 1964, page 7, 
raises interesting questions on the interplay of federal and state legislative 
policy in the trade restraint area. It states that an examiner of the Federal 
Trade Commission has issued an order directing Beatrice Food Company 
to divest itself of five subsidiary dairy companies, including the Community 
Creamery Company of Missoula, Montana. This "directive" must be ap- 
proved by the entire Commission before it becomes operative. 

When Beatrice bought it in 1960, Community, one of Montana's largest 
independent dairy companies, was reported to supply about 9.5 percent of 
the state's frozen desserts and 15.5 percent of its fluid milk. Beatrice was 
not in competition with Community. However, the former bought three 
additional Montana dairies within the year. 

The irony in the immediate situation is that it is difficult to see on what 
plane or in what terms these companies could possibly "compete" in the 
Montana market in any event, under its present Milk Control Act. At the 
present time, any competition of any kind with any other dairy in the state 
is out of the question. Not only is price rigidly controlled, but all other forms 
of competitive practices to secure retail customers are outlawed, under the 
Act's "Unfair Practices Section." 

Of course, Beatrice's trade area is nationwide. The federal government 
may consider it unwise nationally to permit any national dairy company to 
achieve a monopoly position in any major market area simply by absorbing 
other local distributors. Then too, the sale of the subsidiaries will tend to 
keep down the unit size of the milk distributors in Montana so that should 
the Milk Control Act ever be repealed, the industry could more easily revert 
to normal competitive practices. 

155 



Chapter VIM 
Summation 

A study of five principal areas in which the law has restricted 
in some degree the ordinary operation of free competition supports 
the conclusion that, except for the milk industry, the controlling 
regulatory statutes have caused no fundamental permanent changes 
in Montana's distribution and marketing systems. Moreover, certain 
additional sporadic attempts at such regulation in other fields have 
proved abortive. 

Attempts to regulate and license photographers, to grant a mo- 
nopoly to licensed pharmacists of the handling of all forms of drugs, 
packaged and otherwise, to guarantee the plumbing trade a pro- 
tected market, were unconstitutional. Further, the tenor of the 
Supreme Court decisions striking down these statutes requires the 
conclusion that had Montana tried also to regulate prices in the 
dry cleaning business, in the thirties, as did many other states, it 
too would have been ruled unconstitutional. 

However, the five acts here considered, and passed in that period 
avowedly and primarily for the purpose of regulating prices, have 
had a substantial influence on marketing practices, modifying pric- 
ing practices substantially for the time being. 

UNFAIR PRACTICES ACT 

At the outset, under the vigorous administration of the members 
of the grocery trade acting as the Montana Trade Commission, the 
Unfair Practices Act, which prohibits below cost sales generally, 
provided it is with an intent to injure competitors and destroy 
competition, did substantially modify pricing practices, particularly 
in the grocery business. The trade came to understand, generally, 
that the one thing necessary to subject a store to a charge of vio- 
lating that Act was to sell below cost. The Ormesher case, decided 
in 1939, actually stressed the requirement that the state must prove 
two elements for a violation: 1. A below cost sale; and 2. A sale 
"for the purpose of injuring competitors and destroying competi- 
tion." For at least fifteen years, the fact that the Court had upheld 
the validity of the Act, and affirmed a conviction under it, was 
enough to enable the grocery trade to cite it as supporting the 
administration of the Act practically as price fixing legislation. 
There is not much doubt that price competition practices were 
patterned accordingly. 

156 



In 1953, however, a well-reasoned Montana Attorney General's 
opinion reaffirmed the intent requirement in the Act. About the 
same time, developments in California (the source of our Act) in 
Court decisions and in the administration of its Act by the Attorney 
General's Office there, gave added force to the conclusion that the 
intent to destroy competition is required for a violation. That is, 
the Unfair Practices Act simply intends to regulate unfair trade 
practices and not to fix prices. These developments finally influ- 
enced the Commission's thinking. Hence, within the last six to 
eight years, under the guidance of its present counsel, the Trade 
Commission probably has become more aware of the legal signifi- 
cance of the state Supreme Court's repeated statement that this 
Act is not a price fixing Act. 

In fact, currently, the Board seems inclined to administer the 
Act so as to allow substantial flexibility in pricing practices. So, 
generally speaking, a merchant may be able to defend against a 
charge for alleged below cost sales, either: 1. Under one of the 
stated exceptions expressed in the Act itself; or, 2. By justifying 
his price as a desirable or necessary marketing practice, not "de- 
troying competition;" or, 3. By proving that his price is not less 
than the actual cost of the product to him. 

Though they have been in the Act for most of its existence, many 
merchants probably have not been aware of the five special cases 
in which below cost is permitted by the Act itself. These are: 1. 
Good faith close out, either of perishable or seasonal goods, or a 
discontinued line. Many sales can be based on this exception. 2. 
Damaged or deteriorated goods. 3. Sale by court order. 4. A good 
faith attempt to meet the legal prices of a competitor. 5. Sales to 
the State of Montana or any of its institutions. 

The "presumptions" which the Commission applies in adminis- 
tering the fourth exception has been drastically modified over the 
years. An early study of the administration of Montana's Unfair 
Practices Act states that in price wars generally, which are the 
natural consequences of acting under this exception, the Trade 
Commission, in its early practice, assumed that everybody was 
guilty of a violation, since generally it was impossible to prove 
who began the price cutting and since, at that time, the Commission 
assumed that any price below its own computed or average cost of 
goods was unlawful. But such ruling was indefensible. 

Today, the Commission stresses the fact that it is not the cost to 

a particular merchant which sets the "market floor" but rather the 

lowest cost to the most efficient operator which determines that 

floor. The Commission's present counsel states this proposition 

thus: 1 

'Statements by the Commission's counsel are taken from correspondence dated 
Nov. 15, 1960, and Jan. 24, 1961. 

157 



. . . nor was it in the intention of the legislature to penalize the most 
efficient operator. The lowest legal price at which an article can be 
sold is the lowest price at which it can be purchased by anyone, 
plus 10% of that purchase price. For example, Safeway can buy soap 
for 5<f a bar. The same bar . . costs me 6<j... Safeway can sell 
that soap for 5%tf . . . and so can I. 

This statement dramatizes the present Commission's willingness 
to recognize considerable flexibility in its administration of the Act, 
even though it considerably overplays the market's freedom in 
pricing under this exception, since, in fact, every other merchant 
is bound by Safeway 's pricing policies rather than his own — 5%^ 
is the going price only if Safeway chooses to make it that. This does 
not make a free market as we understand it. 

The fifth exception to the Act's general prohibitions includes 
sales "to the State of Montana or any of its institutions." Under- 
standably, this exception disturbs many people, because it violates 
the basic policy underlying the Act and, if that policy "is in the pub- 
lic interest," it is difficult to identify any sufficient countervailing 
interest to explain this exception — it seems too much like a parent 
ordering his child not to touch liquor at the moment that he, the 
parent, is imbibing freely. But, added to the Act in a 1941 amend- 
ment, it confirms an earlier Attorney General's opinion finding an 
implied exclusion of the state from the Act's prohibitions. 

The increased freedom of the market, currently accepted by the 
Commission, is much more certainly expressed in other ways than 
in its attitude toward these statutory exceptions. Most importantly, 
it now gives full effect to the Act's intent to injure requirement and, 
where the facts make it hard to prove that intent, it moves cau- 
tiously. This change in attitude is illustrated in numerous ways. 
Its decision finally not to press proceedings to outlaw the giving of 
trading stamps by all stores, even though they represent approxi- 
mately 2-2 Vz percent of the sale price, results from the difficulty 
of proving the intent necessary to find a violation under the Act by 
such practices. 

Also, its attitude toward the question of establishing costs gen- 
erally has beeen modified strongly in the direction of a free market. 
One illustration of that fact is given above. That it has abandoned 
— or at least is trying manfully to abandon — its own "price fixing 
complex," which originally caused it to administer its power to 
compute area operating costs as established market floors, is dem- 
onstrated by the following statement from its counsel: 

. . . defendants are always permitted to prove their actual cost, since 
this is clearly required by the law and is altogether logical. I do not 
believe with Professor Coad that the legislature intended to legalize 
price fixing in providing for cost surveys, but rather only to make it 
easier ... to administer the Unfair Practices Act. 

And, concerning the question of whether the seller can departmen- 

158 



talize his operating costs, the Board's counsel makes this highly 
significant statement: 

8. The Commission has not recognized "departmentalizing" of costs. 
However, in my opinion, any all-out test of the statute would result 
in departmentalizing of costs. Certainly it costs a merchant less to 
sell a package of cigarettes at a rack by the cash register than it does 
to sell an equal amount in value of hamburger or parsley. 

This is a highly important concession in the direction of flexibility 
and freedom in pricing, without encouraging unfair practices — it 
merely gives to an operator the benefits of his enterprise, resource- 
fulness, and efficiency. As Commission counsel adds, it was not 
the intention of the legislature to penalize the most efficient 
operator. 

Another point on which the Commission should be commended 
for a constructive change in administrative policy involves the 
question of how much importance should be given to the relative 
size of alleged offenders in weighing the evidence of their intent 
to injure and destroy. There has been evidence in other states, as 
well as in Montana, that, in the past, the small operator who could 
not injure if he wanted to was the one most frequently proceeded 
against. However, currently, we have the assurance from the 
Commission that: 

. . . the Montana Trade Commission gives every consideration to 
the size of the offending business, its effect on the market and 
whether or not it is apparent that the offending business has the 
intent to destroy competition. These are considerations that every 
enforcement officer must make before bringing a formal complaint. 
In practice how often have we been let go with a warning by a 
police officer when it was apparent that our transgression had been 
slight and unintended? 

Although the illustration given is not the most apt, because, in its 
apparent assumption that there has been at least a technical viola- 
tion, it suggests a persistent subconscious belief that technically 
the Act penalizes all below cost selling, the administrative practice 
described here is reassuring. 

The changes in the attitudes and practices of the Commission 
described and illustrated above clearly require that it permit the 
use of below cost selling for all legitimate purposes, which, of 
course, excludes its use to establish ultimately a monopoly market. 
Though not an exhaustive list, HALPER, page 206, note 1, gives four 
such proper purposes as necessary practices in any dynamic market- 
ing procedure, as follows: 

(1) In new enterprises seeking to get started; (2) In concerns seeking 
to enter new industries; (3) In firms seeking to develop by-products; 
(4) In firms seeking to reduce unit costs through an aggressive 
pricing policy. 

Some authorities insist that loss leaders should be included in any 
list of legitimate practices. 

159 



Currently, the Commission appears to be prepared to accept as 
permissible under the Act most if not all traditional non-predatory 
pricing practices. In response to the suggestion that any pricing 
incidental to introductory or promotional campaigns, not done 
"for the purpose of injuring a competitor and destroying competi- 
tion," should be legal, its counsel answered: "I agree with your con- 
clusion regarding introductory and promotional campaigns." And, 
when asked what, if any, were the limitations on package deals for 
pricing purposes, counsel replied: "The Commission has not formed 
any regulatory limits on the package deals, either as to the character 
of the items or the number of items in a package." 

In short, it appears that under the Montana Trade Commission's 
current administration there are no serious restrictions on any 
form of non-predatory pricing practices. 

FAIR TRADE ACTS 

The second principal Act considered in this study, the Fair Trade 
Act, formally authorizes the owner of a trademarked product in 
"free and open competition" with similar products to establish by 
contract either the minimum or the exact wholesale and retail prices 
at which it can be sold. This exemption from the general prohi- 
bition of antitrust laws is reinforced by what is known as the "non- 
signer" provision in the Act, which binds all persons generally in 
the market with knowledge of such fair trade agreements. Com- 
monly, the enforcement of this Act is provided by remedies in 
contract or in tort, which must be brought by the persons involved 
or those damaged by violations of the fair trade agreement, or of 
the statute making it an unfair practice for non-signers to sell at 
less than the fair trade price. Hence, its enforcement is private in 
nature. 

Given an "assist" by an early United States Supreme Court de- 
cision in 1936 ruling the Act constitutional, for about fifteen years 
thereafter, state Courts generally also upheld the Act. But a pri- 
mary concern of the retailer under the Fair Trades Acts in most 
states where it has been ruled constitutional has been that of 
securing its effective enforcement. Though remedies have been 
formally available to any person injured by its violation, the prac- 
tical difficulties incident to such enforcement are very considerable. 
For the individual retailer the cost often is prohibitive and, all too 
frequently, the manufacturer has been highly selective in deter- 
mining whom he should sue — often proceeding against the small 
concern while ignoring large cut price operations flagrantly vio- 
lating the stipulated retail price. 

With the provision making it an unfair practice for anyone with 
knowledge of the fair trade price to sell below such price, included 

160 



in both the Unfair Practices Act and the Fair Trade Act in Montana, 
it appears that any person who could sue under the Unfair Practices 
Act could enforce the "non-signer" clause in the Fair Trade Act. 
This includes any person in trade, or the Montana Trade Commis- 
sion itself. There is substantial evidence, however, that the Trade 
Commission sought to wash its hands of that power in the following 
statement of policy, contained in its Rules of Practice and State- 
ment of Policy, published in 1946, at page 20: 

It is the policy of the Commission not to institute proceedings under 
the Unfair Practices Act where the alleged violation of law is a 
private controversy redressable in the courts, except where said 
practices tend to affect the public. In cases where the alleged injury 
is one to a competitor only and is redressable in the courts by an 
action by the aggrieved competitor and the interest of the public 
is not involved, the proceeding will not be entertained. 

Responding to the question of what was behind this statement, the 
Trade Commission's present counsel offered the following: "9. I 
did not have anything to do with preparing the Rules of Practice. 
However, I believe the Commission was attempting to avoid being 
involved in fair trade violations. . . ." However, the above Rules of 
Practice have not regulated the Commission's administration for 
some years now. In any event, recent developments in Montana 
presumably have made the question of how best to enforce this Act 
academic, for the following reason. 

Beginning shortly after 1950, a strong tide running against the 
Fair Trade Act set in. By 1961, a substantial majority of state 
Courts, ruling on the act's validity, had found it unconstitutional, 
though on a variety of grounds. In 1960, at least two national manu- 
facturers determined to test the Montana Act in the Courts. Of 
three suits filed, one was appealed to the state Supreme Court as 
the test case. On February 10, 1961, that Court ruled Montana's 
Fair Trade Act unconstitutional in its entirety, under its Constitu- 
tional provision prohibiting trade restraints of all kinds. The other 
two suits were dismissed immediately. Presumably, Montana's Fair 
Trade Act now is a dead letter. 

It still is possible for much of Montana's trade to become subject 
to fair trade restrictions, however. Despite at least two major re- 
ports from federal agencies strongly critical of fair trade legisla- 
tion, its supporters are vigorously lobbying Congress for a federal 
Fair Trade Act, much broader than state Acts and covering all 
trade in interstate commerce or affecting that commerce. With the 
growing doubt that it has value either for the manufacturer or the 
retailer, however, (not to mention the consumer) the prospects for 
its passage are not very favorable — at least in the present economic 
climate. (But see 1963 Addendum to Chapter Vi) 



161 



BARBER AND BEAUTY SHOP ACTS 

Regulated since 1929 for sanitation and health reasons, the ad- 
ministrative agencies supervising these trades have had the power 
to set prices since 1939 and 1941, respectively. In the past, however, 
the Board of Barber Examiners and the State Examining Board of 
Beauty Culturists could not establish fixed prices on their own 
initiative; they had to wait until a certain majority of operators in 
a community or a county submitted a proposed price schedule for 
their approval. In the 1961 legislative session, however, the beauty 
shops secured an amendment to the Beauty Culturists Code giving 
their Board the power to initiate hearings and set prices for the 
entire state, on a county to county basis. 

Whether these Acts would withstand attack on their constitu- 
tionality will depend on how much weight the Montana Supreme 
Court is prepared to give to the legislative recital in them that their 
regulation is on behalf of the public health and welfare. They might 
be questioned both on alleged lack of due process and on unlaw- 
ful delegation of legislative authority, though the Cosmetologists 
(beauty culture) Code has been strengthened against both charges 
by the 1961 amendments. 

Currently, a substantial majority of those states ruling on similar 
Acts have held them unconstitutional, some of them assuming that 
cases ruling unconstitutional Acts providing for price fixing in the 
dry cleaning business are controlling in the barber-beauty shop 
trades. This, however, does not give effect to certain significant 
differences in the two fields with respect to their relationship to 
public health and welfare. 

Since prices have been generally stable in these trades through- 
out most of the state most of the time for the past twenty years, 
enforcement of the Acts has been quite informal. Probably a major 
contribution to that stability has been participation by the unions 
in these trades in helping to enforce the price schedules originally 
adopted. Reportedly, the Barber Board has filed only one suit 
against an operator for violation of the Board's rules, and that 
within the last year, though licenses have been cancelled on a few 
other occasions. 

But, whatever may be the legal status of these Acts, generally, 
the provision in the Barber Act authorizing the Barber Board to 
revoke the license of any barber convicted of a felony illustrates 
an all too common provision in Acts providing for the licensing of 
trades and occupations generally, which must be obnoxious to every 
person determined to maintain substantial limitations on political 
arbitrariness of all kinds. Such provisions have no place in Acts 
regulating ordinary trades and occupations and should not be toler- 
ated. 

162 



MILK CONTROL ACT 

The Milk Control Act is the one Act studied under which the 
production and distribution of the product regulated has become 
irrevocably lost to the "free market." A recent feature article in 
the DAILY MISSOULIAN gave a glowing account, at least for 
western Montana, of the economic condition of the dairy industry. 
As presented there, this business has enjoyed very nearly unpar- 
alleled prosperity through the last twenty-three years of strict, rigid 
price control. It described the value and volume of product at the 
processor and distributor levels. 

In fact, however, although this study could not and has not tried 
to give final answers as to the present and prospective economic 
conditions of the dairy industry, it went far enough to raise grave 
questions in the writer's mind as to what is the future of dairying 
in Montana under strict price control. Hence, today the pressing 
question under Milk Control Acts is not whether the regulation is 
constitutional. That was decided generally in its favor twenty-five 
years ago by the United States Supreme Court in the Nebbia case. 
The important question is the very practical one of, "What effect 
is the law having on the economic institutions, and in the relation- 
ships involved, in the production and distribution of dairy prod- 
ucts?" Testimony and other evidence presented at the Area X price 
hearings in Missoula, in August-September, 1960, graphically pro- 
jected that question. And the conclusions of others attending a 
number of similar hearings agree that the problems giving rise to 
the question are very real. 

That substantial and important changes have come about in the 
economic institutions involved is obvious. During the twenty years 
of price control, the trend to ever larger but fewer processors has 
developed rapidly. Granted there are other economic factors and 
forces at work resulting in fewer but much larger distributors, 
there is evidence that control at least has facilitated this natural 
trend. Moreover, many individual producers are dropping out. And 
a recent petition to the Milk Control Board from producers alleged 
that some distributors were making a determined effort to con- 
centrate production into the hands of a few very large producers, 
who, of course, would have to be assured outlets. But the most 
crucial changes, those in relationships, are much more subtle, less 
simple, and less easy to understand. 

A primary purpose of milk control is to stabilize production in 
relation to demand. Taking each distributor's milk needs for all 
purposes as the base on which to stabilize production, the natural 
result has been to adjust the production of each producer to the 
requirements of the distributor to which he has been selling. So, 
one of the most fundamental changes in the relationships found in 

163 



the industry involves the degree of dependence on his distributor 
to which each producer must submit. And out of this dominant- 
dependent relationship — a modern form of feudal tenure in the 
opinion of some — there have evolved new claims of ownership, with 
opposing denials. 

Each producer is allotted his "share" of his distributor's milk 
requirements, measured by his demonstrated ability and willing- 
ness to assume responsibility for maintaining that proportion of 
milk supply for the benefit of the distributor. Each producer is 
given a quota for or share of his distributor's milk requirements 
called his "base." Whether a farmer has base largely determines 
whether he can continue to operate at all. Already the practice of 
transferring base with a dairy herd has become well established. 
Allegedly, a cow with base is worth one to two hundred dollars 
more on the market than one without base. Bankers in considerable 
numbers have testified both in price hearings and in litigation that 
owning base is a necessity to the maintaining of a producer's credit, 
but that its legal status is so uncertain that producers have become 
such poor credit risks that banks are reluctant to extend them 
credit, even though it is a business that must make repeated exten- 
sive capital outlays. Hence, in this producer-distributor relation- 
ship, though each becomes dependent on the other, the assurance 
of the continued availability of his outlet for his milk is of much 
more critical importance to the dairy farmer, as producer, than is 
the supply of any single farmer to his distributor. 

That problems arising from current conditions in the milk indus- 
try actually exist is supported not only by testimony and facts intro- 
duced into the various market hearings held recently by the Board. 
The fact that the future of the milk industry in Montana is in doubt 
also is strongly supported by the evidence introduced in a number 
of recent law suits — though none of the issues raised in these suits 
have been finally resolved. 

In a suit in Bozeman, the defendant was charged with a violation 
of the milk price schedule, selling at his home. Evidence indicated 
that he had no distributor outlet for his milk, except possibly at 
surplus prices, barely half the price for Class I milk. In one suit 
in Missoula, a distributor was charged with unlawfully cutting off 
the plaintiff producer. The defendant claimed the right to cut off. 
In the second Missoula suit, the plaintiff producers' cooperative 
charged a distributor with unlawfully interfering with the member- 
ship contracts between the cooperative and various producers in 
the area. But whatever the merits of these particular suits, they 
point up very real possible dangers to the future economic health 
of the milk industry in at least some areas of Montana under present 
conditions. 



164 



The last suit mentioned has particularly ominous implications in 
its suggestion that distributors are or may be actively opposing the 
formation of producer cooperatives in the state. Years of experi- 
ence, particularly under the federal Milk Control Act, but also 
under some other state Acts, establish the extreme value of these 
cooperatives in helping to maintain a balance between the pro- 
ducers and other segments of the milk industry. They help to main- 
tain basically free, and therefore democratic, relationships among 
the various segments of the industry. Reportedly, they have helped 
to keep the distributor honest. They also provide an agency for 
gathering information and for advising and counseling the milk 
producers on many matters. The testimony of a milk equipment 
salesman who works a large area, including the whole of the north- 
central states, in one of the suits mentioned above, was to the effect 
that such cooperatives throughout his trade territory perform an 
invaluable service and in most places have been readily accepted 
by all segments of the industry. Further, dairy marketing specialists 
of all kinds concur in this judgment. 

Nevertheless, in 1959 the Montana legislature repealed a section 
in the Act which expressed a legislative policy strongly approving 
the participation of producer and producer-distributor cooperatives 
in the marketing process. This is especially ominous in its implica- 
tions. If recent rumors that the present Milk Control Board itself, 
containing no industry representatives, has expressed hostility to 
these producer cooperatives are true, this is one of the most dis- 
turbing in a whole series of recent developments which may raise 
questions as to the future stability and solvency of milk producers 
in some parts of Montana . 

An intensive study of current trends in the milk industry, under 
price control, appears to be urgently needed. A larger measure of 
correlation of state control with federal control might result in 
improvement. Even if price control must continue, whether it 
should operate at all levels or merely at the producer level, as does 
federal regulation, needs extensive reviewing. Very possibly, for- 
mula pricing should be authorized. But most importantly, strenuous 
efforts should be made to assure the producer of greater availability 
of outlets than he has under the present system. Possibly the only 
alternative is to grant him a larger measure of legal rights in the 
outlet that is available to him. 

1963 ADDENDUM 

In view of the current developments in the administration of the 
Unfair Practices Act by the Montana Trade Commission, the present 
status of the pricing practices discussed above on pages 157-160 is 
not clear. Very possibly, the Commission would challenge at least 
some of those practices. 

165 



DEC 



10-64 



3 8 Si A 



Legal barriers to competition main 
338.9786B854IC.2 



3 12h5 033^47 D3M14